Boom boom bust: ethanol glut looms

The Strib's Matt McKinney has a swell piece in today's paper about the dimming economic prospects of the ethanol industry. With corn prices rising, ethanol prices tumbling, and production exploding, it may take years to correct the looming market imbalance. Slate also ran a nice primer on this topic last week.

The specific numbers are eyepopping. Currently Minnesota has 17 ethanol plants with a production capacity of 675 million gallons per year. According to the Minnesota Pollution Control Agency, four other facilities are currently under construction with the ability to produce an additional 400,000 gallons annually. What's more, 11 plants are in the planning stages with a potential production capacity of 900,000 gallons each year. In other words, by 2010 Minnesota could be producing some 2 billion gallons of ethanol annually--equal to nearly a third of the country's current ethanol consumption.

The numbers nationwide are similar. Since just the beginning of 2006 ethanol production has jumped by nearly 50 percent. According to the Renewable Fuels Association, there are presently 140 ethanol plants operating with a production capacity of roughly 6.9 billion gallons per year. However, there are plans underway to build or expand 84 plants, increasing the annual production capacity to 13.5 billion gallons in the near future.

What do these numbers mean? Consider that currently there is a 10 percent federal cap on ethanol levels in standard gasoline. Furthermore Americans presently consume roughly 130 billion gallons of gasoline per year. In other words, even if every gallon of gasoline sold were to contain the 10 percent maximum of ethanol, there would still be an overabundance of corn-based fuel on the market in the coming years.

So who's going to consume all of this ethanol? One (unlikely) possibility is that the EPA could raise the percentage of ethanol allowed in standard gasoline to 20 percent--a policy touted by Gov. Tim Pawlenty.

A more likely scenario is a massive increase in flexible-fuel vehicles, which can run on fuel that is up to 85 percent ethanol. David Morris, of the Institute for Local Self Reliance, and a strong supporter of corn-based fuel, points out that converting vehicles to flex-fuel only costs manufacturers about $100. Barack Obama, for one, is pushing for a mandate that all new automobiles be flex-fuel vehicles.