High gas prices leading to lower demand for ethanol

Waning demand for gasoline is putting the United States on course to miss a target for ethanol use for the first time, signaling no let-up in the slide in prices.

A 2007 U.S. law requires refiners to mix 13.2 billion gallons of renewable products with motor fuels in 2012, up 4.8 percent from last year. Gasoline demand averaged over four weeks fell 3.8 percent from a year earlier, the U.S. Energy Department reported Wednesday. On an annualized basis, fuel consumption was 131.4 billion gallons.

Ethanol’s discount to gasoline widened to a record $1.25 a gallon on March 29, more than three times the 12-month average, as the surplus supply of the biofuel grew. Demand is falling as gasoline, or the reformulated blendstock known as RBOB, soared 24 percent this year, becoming the best performer of the 24 commodities in the Standard & Poor’s GSCI index. Ethanol is blended into gasoline at a mix of 10 percent.

“We may not make the 13.2 billion,” said Wallace Tyner, an agricultural economist at Purdue University. “Right now it’s not even profitable to make ethanol.”

Ethanol rose 0.9 cent, or 0.4 percent, to settle at $2.284 a gallon on the Chicago Board of Trade. Prices are down 16 percent from a year ago as the market struggles with a glut. Gasoline has risen 4.3 percent on the New York Mercantile Exchange over the past 12 months and settled at $3.3405 a gallon.

Distillers are losing 11 cents a gallon, based on current prices for corn and the biofuel, assuming a bushel of corn generates 2.75 gallons of ethanol, according to data compiled by Bloomberg. Producers were making about 4.3 cents a gallon on the fuel at this time last year.

Ethanol, fermented from corn in the U.S., has received government support since the Energy Tax Act of 1978. President George W. Bush made it part of his plan to reduce U.S. dependence on foreign oil in 2006 and more than doubled the country’s renewable fuels targets in the 2007 law that calls for the U.S. to use 15 billion gallons of the fuel by 2015.

U.S. production more than doubled to 13.9 billion gallons in 2011 from 6.5 billion in 2007, according to the Renewable Fuels Association, a Washington-based trade group.

Congress, last year, allowed a 45-cent-a-gallon tax credit that helped support demand to lapse. The incentive had been in place since Jimmy Carter was president and ethanol proponents assumed that the blending target, known as the renewable fuels standard, would be enough to maintain sales growth.

“If you want to hindsight them and say it was a bad call you could,” Jason Ward, an analyst at Northstar Commodity Investments in Minneapolis, said. “The more appropriate call is that nobody saw this happening with demand. This is not normal.”

Demand is slowing as the U.S. economy is expected to grow at an average of 2.2 percent this year, according to data compiled by Bloomberg. That would be down from a 3-percent annual rate in the last three months of 2011.

Ethanol proponents may have won a partial reprieve in January 2011, when the Environmental Protection Agency granted a request from producers to raise the allowable amount of the biofuel in gasoline for vehicles made after 2001 to 15 percent from 10 percent, a formula referred to as E-15. The increase may spur increased ethanol use even as gasoline demand falls.

The EPA on April 2 said it approved applications from Archer Daniels Midland Co., Cargill Inc. and 18 other companies to market ethanol in the higher blend with gasoline. President Barack Obama has set a goal of helping filling station owners install 10,000 blending pumps for E-15 over the next five years.

Iowa Governor Terry Branstad said in a March telephone interview that his state, the largest ethanol producer in the U.S., is working to be the first to use the higher blends and serve as a template for other states to follow.

While the higher concentrated formula would help the U.S. reach the biofuels targets and soak up the glut, retailers may be hesitant to sell it because of the potential liability for damaged engines and warranties, Tyner said.

Producers are making more ethanol than they can sell. Ethanol stockpiles have risen 13 out of the past 16 weeks going back to Dec. 16 and reached a record 22.7 million barrels in the week ended March 16, according to Energy Department data.

“You’ve got ethanol spilling out of storage, that’s your problem,” Ward said.

The EPA may have to reduce the requirements for how much refiners are supposed to use this year, said Michael Cox, an analyst at Piper Jaffray & Co. in New York.

The administration had to cut the targets for so-called advanced biofuel in 2011 and this year because the fuel, made from switchgrass, woodchips or agricultural waste, isn’t yet commercially available.

Retail gasoline demand through March 30 was 5.6 percent below the same period in 2011 because of higher prices, according to MasterCard Inc.’s SpendingPulse report on April 3. Fuel use over the previous four weeks was 5.9 percent lower than a year earlier, a record 54th consecutive decline.

“On the one hand, you have an economy that is recovering, albeit at a very sluggish rate, and on the other hand, we’re headed toward price levels we haven’t seen since 2008,” John Gamel, a gasoline analyst and director of economic analysis for SpendingPulse, said by phone.

That will make it difficult for the U.S. to use the 13.2 billion gallons of ethanol this year and even more challenging for it to consume the 13.8 billion in 2013, said Ian Horowitz, an analyst at Topeka Capital Markets Inc. in New York.

“Something has to budge,” Horowitz said. “We’re in the world of oversupply again.”