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As oil prices rise, ethanol sees rebound

  • Los Angeles Times
  • Published Sunday, March 13, 2011, at 12:05 a.m.

LOS ANGELES — Corn-based ethanol is the renewable fuel environmentalists love to hate. But as turmoil in the Middle East and North Africa has sent oil prices soaring, U.S.-made ethanol is making a comeback.

Plants mothballed during the economic downturn are reopening. Domestic ethanol production hit record levels last year, topping 13.2 billion gallons, according to the Renewable Fuels Association in Washington. Oil companies, including Valero, Sunoco and Marathon Oil that snapped up facilities when the industry hit a rough patch a few years ago are looking to expand.

The recovery can be seen in Stockton, Calif., where a once-shuttered factory is now thundering to life. Train cars laden with Midwestern corn arrive daily to feed the grinding mills and steaming pipes that distill the grain into the gasoline substitute. The surrounding air is pungent with the smell of yeast.

For the plant's owner, Pacific Ethanol, which weathered bankruptcy and is slowly reviving three of its plants, it's a whiff of vindication.

"Ethanol is an important part of the country's energy picture these days," said Neil Koehler, chief executive of the Sacramento firm.

That's largely because of Uncle Sam. Concerned about U.S. reliance on foreign oil, federal lawmakers mandated that the nation quadruple its use of biofuels to 36 billion gallons annually by 2022 from 2008 levels. Corn-based ethanol is assured a 15 billion-gallon share of that market. Plus it's heavily subsidized. The federal government gives producers a 45 cent-a-gallon tax credit. A number of states provide subsidies as well.

The liquid is blended into almost every gallon of unleaded gasoline sold in the U.S. and accounts for about 10 percent of the fuel that motorists pump into their cars. That percentage is set to rise as the U.S. Environmental Protection Agency recently approved the use of blends of up to 15 percent ethanol for newer vehicles.

That's good news for the ethanol industry with oil now topping $100 a barrel and motorists experiencing sticker shock at the pump.

"At a time of increased energy uncertainty and volatility, domestic ethanol production... is helping create the kind of economic and energy opportunities this country will need to regain control over our future," said Bob Dinneen, president of the Renewable Fuels Association.

'Greenness' debated

But whether corn ethanol is good for the planet, U.S. taxpayers, the global food supply — or even an automobile's engine — is a matter of intense debate.

Some scientists have concluded that growing corn, harvesting and distilling it, and trucking it to refineries causes as much environmental damage as burning oil. Many environmentalists want taxpayer subsidies devoted to developing next- generation biofuels rather than supporting big agribusiness and the oil companies that are now operating ethanol plants.

Budget hawks also want to end ethanol subsidies at a time when commodities prices are rising and the U.S. budget deficit is ballooning. An estimated 35 percent of the U.S. corn crop will be devoted to ethanol this year, a figure that makes some agricultural and global food policy analysts uneasy.

Speaking at an Agriculture Department conference in February, former President Clinton warned about the need to strike a balance between farming for food and biofuels, given political instability in parts of the developing world.

"We have to become energy-independent. We don't want to do it at the expense of food riots," Clinton said.

Auto manufacturers are concerned as well. They're suing the EPA to stop sales of the 15 percent ethanol blend, known as E-15, which they said would confuse consumers and damage older vehicles.

Ethanol industry officials said E-15 pumps would be clearly marked, so consumers would not be misled. And they said political instability in the Middle East and rising oil prices are to blame for higher food prices. Far from taking corn out of the global food supply, ethanol proponents said, the distillation process yields a protein-rich grain byproduct that's being used to feed livestock.

17 plants reopen

Critics of ethanol aren't deterring investors — 17 idled ethanol plants have reopened across the United States in the past year. And the country's largest producer, Poet, is seeking federal help to construct a 1,800-mile, $4 billion ethanol pipeline.

Despite the turnaround, memories of the previous bust still linger. In the early to mid-2000s, investors poured billions of dollars into U.S. ethanol plants. But the building frenzy led to a glut of product. When the economic downturn hit and corn prices spiked in 2008, rural America was littered with closed plants and bankrupt producers.

Pacific Ethanol's Koehler recalls that boom-bust cycle too well.

The company was founded by former California Secretary of State Bill Jones, a political ally of former Gov. Arnold Schwarzenegger, and backed partly by Microsoft Corp. chairman Bill Gates' Cascade Investment. During its heyday in 2006, it operated four plants, including one in Stockton and another in Madera.

In 2009, as the industry slumped, Pacific Ethanol's subsidiary that operated the plants filed for bankruptcy protection. Three of its four facilities were closed.

But the company has been resurrected by the recent market shift — and with taxpayer help.

State subsidies, drawn from a $15 million fund for alternative fuels, helped the company reopen its Stockton plant in December and hire a staff of 45.

Pacific Ethanol is now applying for more taxpayer subsidies to reopen its plant in Madera, Calif.

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