BY LYDIA THEW, Medill News Service
Times of Northwest Indiana
Gas prices have been falling recently, which consumers seem to agree is a good thing. However, in the Midwest, a moderation in oil prices could impact the ethanol industry and the corn farmers who supply it.
Over the past two years as petroleum-based fuel prices skyrocketed, ethanol gained a foothold as a cleaner, cheaper alternative fuel. Now that crude oil prices are falling, the question is whether ethanol will continue to see strong growth.
For now, analysts say, the outlook for ethanol remains strong because petroleum prices aren't likely to drop significantly, and government policy encourages ethanol production.
The American Automobile Association, Inc. reported Wednesday that the national average price of regular gasoline had declined nearly 38 cents since the middle of September, to $2.262 per gallon, the lowest price since early March.
"We believe in the short-term, gas prices may continue to go down. We're between the home heating oil season and when demand begins to dip," said Mantill Williams, AAA's national director of public affairs. But Williams said gas prices are unlikely to dip below $2 per gallon because OPEC producers would cut production to prevent such a drop.
Bill Nelson, associate vice president, grain and cotton analyst at A.G. Edwards & Sons Inc., said, "Our analysts are very bullish in terms of ethanol production."
Nelson said in 2006, less acreage was farmed for corn in the United States, which caused corn futures prices to increase.
In addition, China, a large exporter of corn, is investing heavily in ethanol production to meet their rising energy demands. As a result, Nelson expects Chinese corn exports to decrease, thereby creating higher demand and higher prices for U.S. corn.
December corn futures at the Chicago Board of Trade closed Wednesday at $2.84 a bushel, up 16 percent from last year at this time. Nelson said biofuels such as ethanol seem to be the reason for rising corn prices. "I can't fathom what else would be behind such higher prices year to year," Nelson said.
Nelson noted that ethanol production got a shot in the arm when crude prices broke above the $40-per-barrel ceiling in 2004, and even at today's $58-a-barrel range, oil is still expensive by comparison.
Steve Sorum, project manager at the Nebraska Ethanol Board, agreed "the floor has been raised on gas prices and is likely to stay that way. That's where confidence in the ethanol industry comes from."
Sorum added that the Renewable Fuels Standard legislation in which Congress mandated the production of 7.5 billion gallons of renewable fuels By 2012 will be achieved in the next 18 months. "The industry is growing still at a record pace," Sorum said.
Douglas Durante, executive director at the Clean Fuels Development Coalition, added that although a short-term moderation in oil prices may discourage some from investing in ethanol, production is destined to grow.
"Ethanol is a long-term commodity-driven business," Durante said.
Light sweet crude futures for November delivery were trading just below $58 a barrel on the NYMEX Wednesday afternoon. According to the AAA Daily Fuel Gauge Report Web site, the average price of a gallon of regular unleaded gasoline Wednesday was $2.255.