Can ethanol benefit from a drop in oil prices?

A new school of thought has emerged that ethanol may actually benefit from the recent fall in oil prices, to nearly half their level of a few months ago.

The main exponent of this theory is Andrew Topf, writing on OilPrice.com. His logic is sound, and there are a few recent developments to back him up. It isn’t a sure thing, but there is a strong possibility that ethanol could emerge from the current oil price plunge as a winner.

Here’s the argument Topf makes: He acknowledges that ethanol prices have fallen along with gas prices, so the market doesn’t look very promising. Also bedeviling the industry is the foot-dragging by the Environmental Protection Agency, which has not yet set a renewable goal for ethanol for 2014. The EPA is supposed to set a number every year that specifies how much corn ethanol will be consumed. This is supposed to be enough to meet the 10 percent standard that ethanol is supposed to meet in replacing gasoline every year.

Buffeted by this uncertainty, however, the industry has taken its own initiative and started exporting ethanol. To its surprise, the market has proved very favorable. Canada, the Philippines and Japan have all proved to be receptive to the idea of stretching their gasoline supplies with ethanol. Green Plains, Inc., one of the major U.S. producers, is going to export 15 percent of its product in the fourth quarter of 2014. “We are booking export sales into 2015, extending into the third quarter of next year,” Green Plains president and CEO Todd Becker told investors in a conference call in October. “We typically have not seen export interest that far out in the future.”

The U.S. has pursued contradictory policy on ethanol from the beginning, giving the encouragement of the 10 percent mandate, coupled with subsidies and tax breaks going back to the 1990s. Then became President Bush’s mandates, which guaranteed a market for ethanol through 2023 and also specified a market for cellulosic ethanol, which has never materialized — even though the EPA has charged refiners for a product that didn’t exist.

So what will happen with ethanol amid falling oil prices? One straw in the wind came in South Bend, Indiana, where a corn ethanol plant that had been closed for several years finally reopened. The chances for the plant to succeed are much greater now that corn prices are at their lowest in five years, Purdue University agricultural economics professor Christopher A. Hurt told The Times of Northwest Indiana. “I think the prospects appear to be quite favorable for that plant if they can get it up and running as quickly as possible,” he said. And that doesn’t take into account the possibilities for export to countries that are dependent on imported oil.

The ethanol effort is often criticized as one that wouldn’t even exist were it not for government support that has boosted it all the way. The entire farm bloc are now supporters of ethanol. However, to everyone’s surprise, when the subsidies ended, ethanol production kept increasing!

Now that ethanol has found a market abroad, it is possible that even amidst falling oil prices, the industry will be able to even keep growing. Ethanol still has a high octane level and substitutes for much more noxious chemicals by blending with gasoline. Its role as at least a 10 percent additive seems secure. Now let’s find out if ethanol can find a place in the world market as well.