Cheap Oil Makes It Tough For Ethanol

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During the week of August 24, stocks experienced the worst volatility its seen since the Great Recession. Due in part to weakness in the Chinese markets after the government issued a sharp devaluation of the renminbi, all segments including the energy-needy manufacturing area sunk. Already depressed pricing for barrels of oil sunk even farther, beneath the unthinkable $40 price tag.

The lowest oil prices in six years are hitting biofuel producers two ways: They’re making ethanol less attractive as a blend for gasoline, and emboldening the arguments of petroleum backers who say the U.S. law mandating consumption of the fuel alternative is obsolete, Standard & Poor’s Ratings Services Inc. said in a report on August 19.

"The most noteworthy trend in the energy industry during the past year has been the precipitous decline in commodity prices, and chief among these has been plummeting oil prices," Michael Ferguson, Credit Analyst at S&P, wrote. "The lower oil prices may present a difficult rationale for blending ethanol."

Crude oil has fallen 57 percent in the past year to $40.80 a barrel on the New York Mercantile Exchange, the lowest since March 2009. Gasoline has plunged 42 percent and ethanol has dropped 31 percent.

Regulatory support has also waned. In May, the Environmental Protection Agency proposed reducing the amount of ethanol required to be mixed with gasoline from statutory levels set in 2007, citing changing driving habits and fuel use since then.

That’s not reason enough to abandon the policy, according to Growth Energy, a Washington-based trade group. "Cheap gas and cheap oil is never a certainty, and often it is the exception," Tom Buis, Chief Executive Officer of the lobby, said in an e-mailed statement.

The Renewable Fuels Association, also a Washington-based trade group, said the S&P report "is really out of step with the realities of the market place today.''

Low-priced crude oil lowers gasoline costs and makes ethanol less attractive for blending beyond government mandates. An additive, ethanol is used to boost gasoline supply and lower prices. 

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