Weather Risks Cloud Promise of Biofuel
Steve Pope/European Pressphoto Agency
Corn plants in Blairstown, Iowa, were pounded by hail
recently and perpetual rains for weeks.
Published: July 1, 2008
The record storms and floods that swept through the Midwest last month
struck at the heart of America’s corn region, drowning fields and dashing
hopes of a bumper crop.
They also brought into sharp relief a new economic hazard. As America
grows more reliant on corn for its fuel supply, it is becoming vulnerable to
the many hazards that can damage crops, ranging from droughts to plagues to
storms.
The floods have helped send the price of ethanol up 19 percent in a month.
They appear to have had little effect on the price of gasoline at the pump,
as ethanol represents only about 6 percent of the nation’s transport fuel
today.
But that share is expected to rise to at least 20 percent in coming decades.
Experts fear that a future crop failure could take so much fuel out of the
market that it would send prices soaring at the pump. Eventually, the cost
of filling Americans’ gas tanks could be influenced as much by hail in Iowa
as by the bombing of an oil pipeline in Nigeria.
“We are holding ourselves hostage to the weather,” said John M. Reilly, a
senior lecturer at the Massachusetts Institute of Technology and an ethanol
expert. “Agricultural markets are subject to wide variability and big price
spikes, just like oil markets.”
Three years ago, Americans discovered that the vicissitudes of the weather
could have a powerful effect on energy prices when two hurricanes struck the
Gulf Coast. Hurricanes Katrina and Rita interrupted a quarter of the
nation’s oil production and closed dozens of refineries for weeks. Lines
formed for the first time since the 1970s as gasoline spiked above $3 a
gallon, a record at the time. The nation’s increasing dependence on crops
for motor fuel adds another level of vulnerability from the weather.
It is still too early to estimate damage to corn crops from the recent
floods, or their impact on ethanol output. Iowa, the biggest corn state, may
have lost as much as 10 percent of its harvest, according to preliminary
estimates.
But concerns that the floods could tighten corn supplies this year have
pushed up both corn and ethanol prices. Ethanol, which was already rising
before the floods, has nearly doubled from its low of $1.50 a gallon in
September.
Unexpected interruptions in oil supplies have been a factor driving oil
prices above $140 a barrel lately. Given the tight oil market, there is
little untapped capacity that can be brought online to make up for sudden
supply interruptions, whether of oil itself or of the biofuels that are
increasingly substituting for oil.
In the 1980s, the oil capacity cushion peaked at around 20 percent of global
consumption. Today, it represents only about 2 percent — less than Iran’s
petroleum exports. Analysts have warned that such record-low levels of spare
capacity pose unprecedented risks to the stability of oil markets and
introduce a significant premium in the price of oil.
“There is now a vulnerability to perfect storms, not just in a metaphorical
sense, but increasingly in a literal sense,” said Daniel Yergin, the
chairman of Cambridge Energy Research Associates, a consulting firm. “In
addition to geopolitical risks, you must now add weather risks.”
While storms, torrential rains and hurricanes have always been a part of
energy production, the areas where most of the nation’s new oil and ethanol
supplies are coming from — the corn belt and the Gulf of Mexico — are
especially vulnerable to hazardous weather.
“Our energy policy is like playing Russian roulette with every chamber
loaded,” said Lawrence J. Goldstein, an energy analyst at the Energy Policy
Research Foundation, a group backed by the oil industry. “We’ve doubled up
on the weather risk.”
Both the government and the ethanol industry recognize the risks of tying
fuels to crops. The secretaries of energy and agriculture, in a joint letter
to the Senate, recently said: “If we assumed a supply disruption of ethanol,
we would expect a fairly large increase in the price of gasoline until
ethanol supply were re-established or new market equilibriums were
achieved.”
Backers of biofuels contend that growing ethanol supply is keeping gasoline
prices from rising even higher than they have, by anywhere from 35 cents to
50 cents a gallon, in their estimation. They also point out that the
government’s ethanol mandate, which requires oil companies to blend ethanol
into motor fuel, can be suspended in an emergency. Finally, they say that
future ethanol supplies will be derived from materials like switchgrass or
wood chips that are resistant to bad weather.
Bob Dinneen, the president of the Renewable Fuels Association, the
industry’s main trade group, said only two out of 160 ethanol refineries
nationwide shut down because of the storms. Both will reopen soon, he said.
“There is a lot of overblown concern that is not really justified by the
facts on the ground,” Mr. Dinneen said. “Certainly the weather is going to
have an impact on all sorts of industries. It had an impact when Katrina
wreaked havoc on the refining industry. It has an impact on ethanol
production, but it has been minimal.”
In recent years, corn ethanol has been one of the few sources of supply
growth in transport fuels. Indeed, biofuels have become the single biggest
source of new fuels produced outside of countries belonging to the
Organization of the Petroleum Exporting Countries.
Production worldwide is expected to grow by 330,000 barrels a day this
year, to 1.4 million barrels a day, according to the International Energy
Agency.
In the United States, bipartisan public policies have driven the rise of
the ethanol industry. Congress has set rising requirements for oil companies
to blend ethanol with gasoline, backed with generous subsidies that should
total $12 billion this year, according to estimates by
Barclays Capital.
The ethanol mandate is set at nine billion gallons for 2008 and is
scheduled to rise to 36 billion gallons a year by 2022. By various
estimates, that would represent 20 to 25 percent of the nation’s gasoline
consumption by then.
Corn ethanol is capped at 15 billion gallons from 2015 onward. The rest
is supposed to come from advanced biofuels. They would not require food
crops, but bringing them to market depends on perfecting techniques that are
still experimental.
Farmers who support the government’s ethanol policy argue that truly
disastrous weather in the corn belt does not happen often.
“The last time we had real weather problems in the corn belt was 1988,”
said Tom Buis, the president of the National Farmers Union. “That’s pretty
rare.”
Emerson D. Nafziger, a professor of agronomy at the
University of Illinois, said farmers still had time to recover this
year, to some degree. But he said this year’s storms were the first real
test for the nascent ethanol industry.
“We may end up feeling we dodged a bullet this year,” he said. “We’ve had
a run of fairly favorable weather in recent years. But there is no guarantee
it will stay that way.”
Copyright 2008 The New York Times
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