I have said before that a shakeout in the ethanol industry is inevitable. As I wrote here:
When a commodity has such incredibly low barriers to entry, it is only a matter of time before capacity is overbuilt and the price crashes. That’s why I expect ethanol producers to continue lobbying congress to increase the amount of mandated ethanol usage and to accelerate the timeline. Otherwise, a lot of ethanol producers will struggle to stay in business in the next few years as their increased demand for corn continues to increase the price, while all the new ethanol capacity is flooding the market. Profit margins will evaporate (although corn farmers should earn a windfall). What we may see is a bail out reminiscent of the Savings and Loan debacle of the 1980’s.
“Capacity was being built well in excess of the mandated amounts. This ends up squeezing producers on both ends. I have been predicting for at least a year now that there will either be a massive shakeout of ethanol producers—or more likely there is going to be a massive bailout by the government. I also see a high probability that the mandated numbers will be increased to help the producers.”
I recently got the following story via e-mail:
Study: Without more government help ethanol plants could go bust
It spells out the scenario I have envisioned:
Ethanol producers have friendly government policies to thank for the current boom in the corn-based alternative fuel and will need more help from Washington to keep from going belly up in a few years, says a new study.
Without a federally mandated increase in ethanol consumption, small plants could stop being profitable by 2011 and be operating in the red in 2013, according to the study by David Peters, an agricultural economist at the University of Nebraska-Lincoln.
Large plants, meanwhile, could see profits cut in half in four years before losing millions of dollars in seven or eight years and being forced to rely on reserves to cover losses.
Well, we can’t have that, because then Osama wins! Would you rather send your money to a sheikh in the Middle East, or a hard-working farmer in the Midwest? Easy choice. (Think of Lee Greenwood’s “Proud to be an American” as you read that).
More government-driven demand could be particularly important for Corn Belt states such as Nebraska and Iowa where plants have sprouted quickly and are seen by politicians and others as a way of revitalizing struggling rural areas.
But Peters said financial projections for a fuel whose demand “is entirely government driven” show that plants shouldn’t be counted on as a reliable tool for rural resurgence.
The study found that a combination of high corn prices, rising energy costs, lower demand for ethanol in coming years and expiring government tax credits in 2011 could cause a 40 million-gallon plant to lose $1.4 million in 2011 if the current requirement for ethanol consumption isn’t increased. And the slide could begin soon: In 2009, net profits for such a plant could slip from a high of $45 million last year to about $3.6 million, with most of that coming from government tax breaks.
Revenues at larger plants, meanwhile, “will experience a slow decline over the coming decade as the 7.5 billion-gallon fuel standard is met,” the study says. The study says that By 2013, 100 million-gallon plants might only break even.
We are never going to reach energy independence unless we keep subsidizing these ethanol plants and mandating more ethanol usage. After all, we are too close to turn back.
Well, it is just a study, not a reality, yet.
A lot of things could change. Corn prices could come down. They are not trending up anymore. And the feds could mandate higher etanol levels.
I do think we need a slow-rolling ethanol shake-out, in which first-generation plants are replaced by second-generation plants, like E3’s. Eventually, to stand on their own, no subsidies.
And there is some sense behind developing energy independence. Thug states control most of the world’s oil. Thug states are not reliable, have rotten human right records, and even finance terrorism.
I don’t worry about Peak Oil; I do worry about the about ability of developed nations to obtain oil, thanks to the thugs running Venezuela, Nigeria, Iraq, Iran, Libya, Russia, Mexico — outside of Canada, is there one major exporting country you would want to exercise the your right of free speech? And don’t say Mexico, reporters get killed there all the time.
Corn ethanl is a dubious proposition (save maybe E3’s plant), but infant industries often take years to mature.
I would prefer a real energy program, with taxes on consumption, but few want that.
I do think we need a slow-rolling ethanol shake-out, in which first-generation plants are replaced by second-generation plants, like E3’s.
E3 is not second-generation: they still need corn (food) to make their ethanol. E3 is not a completely bad idea: they just need to drop the ethanol production, and then they might have a sustainable farm!
Eventually, to stand on their own, no subsidies.
Eventually, hell freezes over, I guess.
Thug states are not reliable, have rotten human right records, and even finance terrorism.
The question remains: Does ethanol make us more or less independent? Robert’s point is that it is too close to break-even to be betting the farm on.
Corn ethanl is a dubious proposition (save maybe E3’s plant), but infant industries often take years to mature.
Will a feasible renewable energy industry arise from the ashes of the get-rich-quick ethanol industry? I wouldn’t bet on it. Mainly because I don’t think ethanol (in any form) is a viable fuel. Green diesel is a much better (and entirely different) alternative.
Optimist–
Well, the E3 plant claims they will get 5-1 EROEI. That seems wonderful to me. If they get it, then why should we not back ethanol? Better yet, let the market decide.
I understand corn-ethanol shortcomings. But the root of it is low EROEI.
Hey, the political reality is that we have ethanol. So, all we can do is push for E3’s approach. That way, the corn Republican Senators get their jollies (including Senator Craig), and we get fuel, not from a thug state.
The interesting thing is that if the US actually stops importing so much oil, the price of fossil oil would almost surely crack. It will crack someday anyway.
Right now, thug states are getting more revenue, not less, from pumping less. But someday they will bring spending up to the level of their incoming revenues. It won’t seem like a windfall anymore. Then, they are going to start pumping more — just as the world starts wanting less. I understand KSA is a swing producer, and can cut back more, but there are limits.
The question is, will anybody do business in a thug state again?
My guess is that at $70 a barrel, investors will risk business in a thug state, with all sorts of assurances. People forget how quickly in a thug state that contract can become as valuable as used toilet paper.
By the way, I sympathize with RR’s comments on TOD doomsters. Kuwait is running job ads, which say they want to boost production by 2 mbd. If you merely post that, you will get an avalanche of abuse.
I call TOD the “Long on Oil Society of Eccentrics and RecluseS, or LOSERS.
Peak OIl? Did you know that North America, probably in three years, will hit an all-time record fossil oil output? Canadian tar sands will push us above all-time output records, along with Chevron’s Gulf strike.
Hubbert’s Curve predicts light oi production in a tightly defined geographic area, when there are cheaper light oil deposits elsewhere.
Add on: If the USA had been tough in the War of 1812 and taken Canada, and if we had decided in 1847 to take all of Mexico, Hubbert’s Peak would look like Hubbert’s Plateau.
in other words, the arbitrary political lines of the USA are being used to prop up a theory of worldwide oil output.