While debates heat up on whether ethanol will ever be "green," one aspect of the alternative fuel is becoming clearer: explosive production is stifling an established driver of oil markets — U.S. gasoline demand — and could lead to lower prices at the pump.
The ethanol boom comes just as U.S. oil refiners, which had been struggling for years to keep up with rising fuel demand in the world's largest energy consumer, begin to catch up by adding surplus capacity.
Together, these factors could help reverse gasoline supply tightness that has driven fuel prices higher, particularly during the petroleum rally of the last five years.
"Ethanol blending could help ease U.S. refining bottlenecks and that could be ultimately reflected in lower prices at the pump," said Eric Wittenauer, an analyst at AG Edwards in St. Louis.
U.S. gasoline demand growth has averaged about 1.3 per cent annually from 1971 through 2007, but the growth rate has slowed in recent years, even as the population continues to grow, falling to 0.6 per cent in 2007.
Early this year, gasoline demand growth has only been 0.4 per cent, the government said Wednesday.
Meanwhile, ethanol output has rocketed as the U.S. government touts it as a fuel that cuts greenhouse gas emissions and weans the country off foreign oil.
Washington offers producers hundreds of millions of dollars in incentives and gives blenders a credit of 51 cents per gallon for mixing the fuel into gasoline.
Critics say ethanol made from corn has boosted food prices and that the fuel does not cut greenhouse gas emissions much over the life cycle of making and burning it.
But the industry grows nonetheless as new markets open, such as the U.S. Southeast, and blenders invest in terminals across the country.
The subsidies have made ethanol cheaper than gasoline and a much sought after component for blending into motor fuel at levels of up to 10 per cent for all cars, and up to 85 per cent for increasing numbers of specially tooled "flexible fuel" vehicles.
Monthly U.S. ethanol output through November 2007, the last data available, averaged nearly 12.7 million barrels, or 64 per cent higher than average monthly production in 2005, according to the Energy Information Administration, the statistics arm of the U.S. Department of Energy.
Ethanol production this year is expected to rise 130,000 barrels per day (bpd) — or the amount of gasoline a medium-sized oil refinery puts out — to 550,000 bpd, according to the EIA.
And U.S. imports of sugar-based ethanol, a fuel much lower in carbon emissions, from Brazil and producers in the Caribbean and Central America, increased 300 per cent from 2005 to 2006, the EIA said.
To be sure, an extended string of oil refinery outages could always push up gasoline prices. But as the ethanol delivery system grows, it should provide constant pressure on gasoline demand.
"Gasoline demand . . . on an underlying basis, is looking pretty weak in terms of growth," said Adam Robinson, an energy analyst at Lehman Brothers. "And on the other hand, you've got ethanol, which is substituting for gasoline in the existing pool."
