WASHINGTON—Ever since President Bush's State of the Union vow to break America's addiction to oil, interest in the corn-based fuel ethanol has soared.
A giant grains company just hired a top oil executive to be its new CEO, the IRS is giving tax breaks for the installation of ethanol pumps, and even Wall Street investment banks are getting into the game.
But don't write off gasoline yet. For the foreseeable future, ethanol is most likely to remain only a blending agent, mixed into gasoline to reduce America's dependence on foreign oil only modestly.
Numerous hurdles stand in the way before consumers can choose between ethanol and gasoline, chief among them creating a distribution system from scratch.
More than 200,000 miles of oil, gasoline and natural gas pipelines snake across the continental United States. But because ethanol absorbs water from gasoline and oil and can become contaminated, few pipeline operators are eager to push it through their vast networks.
In order to compete with gasoline, ethanol producers would have to build a parallel national pipeline network.
"To build a brand-new system like that would be an extreme challenge, and not just from a financial standpoint," said Raymond Paul, spokesman for the Association of American Operators of Pipelines.
Today, most major oil pipelines originate along the U.S. Gulf Coast, where drilling is concentrated and where the bulk of the nation's oil imports arrive.
By contrast, ethanol production is concentrated in the sparsely populated Midwest, far from consumer markets. Most of the ethanol produced today moves in tank trucks or on rail cars, in what the ethanol industry calls a "virtual" pipeline that costs more than gasoline moving through pipelines.
The costs of creating a parallel distribution system would be staggering. Paul estimates that an ongoing expansion of the oil pipeline system presently costs about $1 million per mile.
That's not to say that ethanol can't help America kick its oil habit.
Virtually any car on the road today can run on gasoline containing up to 10 percent ethanol. Most oil companies already blend a good bit of ethanol into their product. Shell USA estimates that 30 percent of the gasoline it sold last year contained ethanol, and late last year that figure climbed above 40 percent.
But there's a long way to go before ethanol can challenge gasoline.
Today, fewer than 650 fuel stations sell E85, a blend of 85 percent ethanol and 15 percent gasoline. That's a minuscule number considering that roughly 5 million flex-fuel vehicles are on U.S. roads today—cars, pickups and SUVs that can run on either gasoline or ethanol. Most are powered by gasoline, like the other 195 million cars on America's roads.
General Motors is spending millions of dollars on its "Live Green, Go Yellow" TV ad campaign, which began during the Super Bowl and continued during the Winter Olympics. GM touts nine different models with flex-fuel engines, and it says it'll manufacture 400,000 flex-fuel vehicles this year.
GM doesn't note how few places there are to buy E85 or that new flex-fuel cars won't represent much more than 10 percent of its U.S. production.
"Right now it truly is a chicken or the egg proposition," said David Barthmuss, GM's spokesman for environmental and public policy.
For E85 to take off, which comes first—more cars that can run on it or more places to buy it?
GM is helping to bring on 120 more ethanol stations this year, but it won't commit to making its entire production line flex-fuel vehicles—a goal Brazil is closing in on because it requires it.
"It doesn't make a lot of sense to go 100 percent if you don't have enough fueling stations out there," Barthmuss said. "We're trying to build that, and grow that, so more E85 ethanol is available. It's all about choice. This is not the silver bullet."
Congress has given ethanol producers a hand. A broad energy bill last year required that gasoline refiners collectively blend 4 billion gallons of ethanol into their products this year and 7.5 billion gallons by 2012, ostensibly to lower greenhouse gas emissions.
These mandates, blasted by the oil industry as handouts to ethanol producers, lock in a market for ethanol. They also allow producers to begin achieving economies of scale that justify investment in bio-refineries to convert starch crops such as corn or sorghum into a fermented and distilled final alcohol product that's ethanol.
The mandates pleased Archer Daniels Midland Co. (ADM) of Decatur, Ill., the nation's largest ethanol maker. ADM announced on May 10 that it'd soon add 550 million gallons of expanded ethanol production at facilities in Iowa and Nebraska. ADM now produces about 1 billion gallons annually, or a quarter of all U.S.-made ethanol.
Weeks earlier, ADM introduced its new CEO, Patricia Woertz. She's a novice to the grain business but brings something vital to ethanol's expansion—an oil resume. Woertz was lured away from her post as executive vice president of oil giant Chevron Corp.
Bush's brother Jeb, the governor of sugar cane-rich Florida, also talks up ethanol. He's providing corporate tax breaks to companies that make or distribute ethanol and on May 15 called for a plan to have U.S. ethanol production reach 15 billion gallons by 2015.
That target is no accident. That's about the upper limit of what scientists believe conventional ethanol production can yield in the United States. It represents about 12 percent of the 120.4 billion gallons of gasoline the Energy Department predicts Americans will consume annually by 2025. America would still be consuming 105 billion gallons of gasoline.
Enter next-generation ethanol.
Next-generation ethanol technologies could allow ethanol to be made from corn, sugar cane, naturally growing prairie grasses and virtually any kind of plant or plant waste. Backers see potential for 100 billion gallons of unconventional ethanol.
Cellulosic ethanol, or biomass, involves biologically produced enzymes that can break down virtually any plant fiber into a final ethanol product. The drawback has been the inability to produce these enzymes cheaply on a massive scale.
Two companies—Genentech Inc. of South Francisco, Calif., and Iogen Corp. in the Canadian capital of Ottawa—say they can now do it.
Iogen announced on May 1 that Wall Street banking giant Goldman Sachs & Co. had given it vote of confidence by taking a $30 million minority stake in the company.
But this boomlet could bust.
Respected oil forecaster Cambridge Energy Research Associates warns that by 2010 there could be so much new oil coming to market that prices could drop sharply. That could rob ethanol of its urgency.
"I think a lot of enthusiasm for alternatives to gasoline begins to evaporate, because we tend to be a crisis-driven society," said Bob Dineen, president of the Renewable Fuels Association. Dineen nonetheless remained upbeat about the outlook. "Enough people recognize that independent of price, our dependence on foreign oil comes at a high price."
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(c) 2006, Knight Ridder/Tribune Information Services.
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