September 11, 2006

Ethanol boom could be busted by lower oil prices

A USDA economist has said that the current production boom in ethanol could well fizzle out if gas prices head lower as corn prices move higher.

This could spell bad news for the 110 production facilities operational or under construction nationwide, according to Keith Collins, USDA chief economist.

Collins made his statement as he testified before the US Senate Committee on Environment and Public Works about the ethanol industry's future.

Collins also questioned whether ethanol production would top the 10 billion gallons expected by 2010.

World oil prices, on the rise since 1999, have contributed to ethanol's growth, Collins said. Consequently, if oil prices go down sharply, ethanol production expansion would slow because of lower demand.

If crude oil were to fall below US$30 per barrel, there would be less incentive to produce corn ethanol, as it would be unprofitable to produce and market as a fuel extender, Collins said.

Collins estimated that currently, a dry-mill ethanol plant can cover operating costs, with a corn price up to US$5.00 per bushel with ethanol prices around US$2.25 per gallon at the plant.

However, he stressed that even with market fluctuations, projections for energy costs would still favour ethanol industry expansion, at least in the near future, adding that the evolution of ethanol should be closely monitored, he said.