Capacity to produce fuel ethanol from corn nearly tripled between January 2006 and January 2009. However, over the past 18 months, a combination of surplus production capacity, the decline of gasoline prices from their mid-2008 peak level, and high corn prices that boosted producers' input costs have resulted in a sharp decline in ethanol margins. The combination of economic pressures on capacity led some producers to idle plants, and in some cases, file for bankruptcy.
As Table 1 shows, ethanol demand has been rising steadily since 2002. Much of the demand growth through 2004 stemmed from several States banning the use of MTBE from the gasoline pool, because fuel ethanol was the only readily available MTBE substitute.
|Table 1 - Fuel Ethanol Production Capacity*|
|January Nameplate Capacity**||January Ethanol Demand||Capacity Under Construction|
|Year||Number of Operating Plants||(Billion Gallons Per Year)||(Thousand Barrels Per Day)||(Thousand Barrels Per Day)||(Billion Gallons Per Year)|
|*Most production capacity is corn-based.|
|**Nameplate Capacity includes 2.5% denaturant. Ethanol demand is fuel ethanol supplied from domestic production, imports, and stock change.|
|Sources: Renewable Fuel Association. January Ethanol Demand: 2002-2009: Monthly Energy Review, Table 10.3 and 2010 Short Term Energy Outlook estimates.|
Federal legislation also increased demand. In August 2005, Congress passed the Energy Policy Act of 2005 (EPACT 2005), which created the Renewable Fuel Standard (RFS) that mandated using 7.5 billion gallons per year (BGY) of fuel ethanol by 2012. Based on this requirement, more capital was directed toward fuel ethanol production capacity. EPACT 2005 also created liability concerns around MTBE, and the oil industry responded by completing the elimination of MTBE from domestic markets in 2006.
In December 2007, the Energy Independence and Security Act of 2007 (EISA) further boosted fuel ethanol demand by accelerating and extending the RFS program. The revised RFS mandated larger volumes of renewable transportation fuel than EPACT 2005, including specific requirements for advanced biofuels. The revised RFS requires the use of about 15.2 billion gallons of renewable fuel by 2012, of which 13.2 billion gallons (87 percent) is expected to be corn-based fuel ethanol.
As shown in Table 1, by the start of 2009, nameplate capacity reached 814 thousand gallons per day (almost 12.5 BGY), outstripping demand by 170 thousand barrels per day. As a result, only 10.6 billion gallons of capacity was in operation, whereas demand in prior years had used all available capacity. Existing plants plus new construction (assuming all current construction goes to completion) could provide just over 14.5 BGY of fuel ethanol production. That is enough to blend 10 percent fuel ethanol into every gallon of U.S. gasoline.
Surplus capacity tends to put downward pressure on fuel ethanol prices, but gasoline prices also affect fuel ethanol prices (see last November's This Week In Petroleum entitled, Fuel Ethanol Margins: Boom and Bust Cycles.). Gasoline prices have fallen substantially from their mid-2008 peak, leading ethanol prices down as well.
While fuel ethanol prices saw downward pressure during 2008, corn prices pushed up producers' feedstock costs. Like many commodities, corn prices rose during the first half of 2008 and fell back thereafter. In response to the mid-2008 highs, some fuel ethanol producers locked in corn supply prices to protect against the possibility of even higher corn prices. When corn and ethanol prices fell, these producers were stuck with high feedstock costs. VeraSun, for example, cited this as one of the major factors in their October 2008 bankruptcy. Even those plants able to buy corn at lower prices faced razor thin or negative margins.
With surplus capacity and poor or negative margins, producers began to idle capacity and a number of plants sought protection under Chapter 11 bankruptcy. Oil companies acquired some of these plants at discounted prices. For example, Valero purchased seven former VeraSun plants (plus one in development) for $477 million, about 30% of replacement value. Other sales include Sunoco's purchase of the 114-million-gallon-per-year Northeast Biofuels plant in Volney, New York, and Murphy Oil's October 2009 purchase of the idle 110-million-gallon-per-year VeraSun plant in Hankinson, North Dakota for $92 million. Entities outside of the oil industry have also purchased ethanol plants. For example, Guardian Energy, a consortium of six locally owned fuel plants, acquired the 110-million-gallon-per-year VeraSun plant in Janesville, Minnesota.
Although the fuel ethanol industry operates under government mandates, it is not immune to market forces that affect profitability and individual company viability. Today's surplus capacity is likely to be brought into operation in the future, but different owners will be running some of those plants.
Gasoline Price Drops Again
For the second consecutive week, the U.S. average price for regular gasoline decreased. The average slipped about four cents to $2.63 per gallon, $0.56 above the price a year ago. Prices declined in all regions of the country. The averages on the East Coast and the Gulf Coast dropped about three cents, to $2.64 and $2.50 per gallon, respectively. The price in the Midwest dropped the most of any region, tumbling seven cents to $2.54 per gallon. The price in the Rocky Mountains was essentially unchanged at $2.60 per gallon. The West Coast average slipped a penny to $2.89 per gallon, while the price in California dropped two cents to $2.96 per gallon.
Also dropping for the second week in a row, the national average price of diesel fuel fell a cent to $2.79 per gallon. The average is two cents per gallon below the price last year. Except for the Rocky Mountains, the average prices in all other regions each dropped about a penny. But despite the drops, the averages in the Midwest and the West Coast were higher than the prices in those regions a year ago, by half a cent in the Midwest and by $0.13 on the West Coast. The average in the Rocky Mountains was relatively unchanged at $2.82 per gallon. The average in California decreased about a penny to $2.96 per gallon.
Propane Inventories Experience Large Drop
After reaching an 11-year high in October, inventories of propane settled in the lower half of the average range for this time of year, as seasonal demand increases. Total U.S. propane inventories fell by 2.9 million barrels to 65.5 million barrels. The Midwest regional stocks drew 1.6 million barrels and the Gulf Coast region drew 1.4 million barrels. The Rocky Mountain/ West Coast region drew 0.1 million barrels of inventory and the East Coast regional stocks experienced a build of 0.2 million barrels. Propylene non-fuel use inventories increased their share of total propane/propylene inventories from 3.3 percent to 3.4 percent.
Residential Propane Prices Increase
Residential heating oil prices fell during the period ending November 16, 2009. The average residential heating oil price dropped 0.3 cent per gallon last week to reach 274.4 cents per gallon, a decrease of 8.6 cents per gallon from the same time last year. Wholesale heating oil prices decreased 1.6 cents per gallon to reach 204.5 cents per gallon, 11.5 cents per gallon higher than at this time last year.
The average residential propane price rose 2.7 cents per gallon to reach 224.0 cents per gallon. This was a decrease of 20.3 cents per gallon compared to the 244.3 cents per gallon average from the same period last year. Wholesale propane prices dropped 2.1 cents per gallon, from 119.1 cents per gallon to 117.0 cents per gallon. This was an increase of 32.8 cents per gallon when compared to the November 17, 2008 price of 84.2 cents per gallon.
Text from the previous editions of This Week In Petroleum is now accessible through a link at the top right-hand corner of this page.