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Promise of Biofuel Clouded by Weather Risks

Promise of Biofuel Clouded by Weather Risks

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.

Related

Some Glimmers of Good News in Crop Forecast (July 1, 2008)

Times Topics: Ethanol | Biofuels

Charlie Neibergall/Associated Press

Flood-damaged corn plants at a farm near Colfax, Iowa.

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 thebiofuels 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 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.”

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