Ethanol

Little over a year ago, ethanol was winning the hearts and wallets of both Main Street and Wall Street, with promises of greater U.S. energy independence, fewer greenhouse gases and help for the farm economy. Today, the corn-based biofuel is under siege.

In the span of one growing season, ethanol has gone from panacea to pariah in the eyes of some. The critics, which include industries hurt when the price of corn rises, blame ethanol for pushing up food prices, question its environmental bona fides and dispute how much it really helps reduce the need for oil.

A recent study by the Organization for Economic Cooperation and Development concluded that biofuels "offer a cure [for oil dependence] that is worse than the disease." A National Academy of Sciences study said corn-based ethanol could strain water supplies. The American Lung Association expressed concern about a form of air pollution from burning ethanol in gasoline. Political cartoonists have taken to skewering the fuel for raising the price of food to the world's poor.

Last month, an outside expert advising the United Nations on the "right to food" labeled the use of food crops to make biofuels "a crime against humanity," although the U.N. Food and Agriculture Organization later disowned the remark as "regrettable."

The fortunes of many U.S. farmers, farm towns and ethanol companies are tied to corn-based ethanol, of which America is the largest producer. Ethanol is also a cornerstone of President Bush's push to reduce dependence on foreign oil. But the once-booming business has gone in the dumps, with profits squeezed, plans for new plants shelved in certain cases, and stock prices hovering near 52-week lows.

Now the fuel's lobby is pleading with Congress to drastically boost the amount of ethanol that oil refiners must blend into gasoline. But formidable opponents such as the livestock, packaged-food and oil industries also have lawmakers' ears. What once looked like a slam-dunk could now languish in pending energy legislation that might not pass for weeks, if ever.

Ethanol's problems have much to do with its past success. As profits and production soared in 2005 and 2006, so did the price of corn, gradually angering livestock farmers who need it for feed. They allied with food companies also stung by higher grain prices, and with oil companies that have long loathed subsidies for ethanol production.

The U.S. gives oil refiners an excise-tax credit of 51 cents for every gallon of ethanol they blend into gasoline. And even though it's the oil industry that gets this subsidy, the industry dislikes being forced to use a nonpetroleum product. The U.S. ethanol industry is further protected by a 54-cent tariff on every gallon of imported ethanol.

Ethanol prices peaked at about $5 a gallon in some markets in June 2006, according to Oil Price Information Service. The price soon began to slide as the limited market for gasoline containing 10% ethanol grew saturated. New plants kept coming online, increasing supply and dropping prices further. Today, the oil refiners that purchase ethanol to blend in need pay only about $1.85 a gallon for it.

The low ethanol prices help some oil refiners. "I'd pay a hell of a lot more for ethanol than I am right now.... I'm getting a windfall because it's priced so much less than its value to me," Lynn Westfall, chief economist for refiner Tesoro Corp., told investors recently. The ethanol tax credit will bring refiners an estimated $3.5 billion this year. Some oil companies use ethanol to stretch gasoline supplies or meet state requirements to make gasoline burn more cleanly. Ethanol that's voluntarily blended into gasoline reached a high this month, according to the Energy Information Administration.

The low prices reflect soaring output. Global ethanol production has grown to a projected 13.4 billion gallons this year, from 10.9 billion gallons in 2006, according to the International Energy Agency. The U.S. production is more than half of that total, or about seven billion gallons this year, up 80% in two years. It equals less than 4% of U.S. gasoline consumption.

Analysts expect U.S. production capacity to keep growing, encouraged both by high oil prices and by the hope that Congress will stiffen the mandate for refiners to use ethanol. Some observers regard the profit squeeze as part of an ordinary industry shakeout that will ultimately leave the best producers in a position to thrive. As ethanol prices were pushed lower and corn prices stayed high, ethanol profit margins dropped from $2.30 per gallon last year to less than 25 cents a gallon.