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Another Ethanol Producer Goes Bust

The recurring lesson emerging from the corn ethanol scam is this: too many mandates and subsidies are probably worse than none at all. Evidence of that can be found by looking at Aventine Renewable Energy Holdings, the Illinois-based ethanol producer. Last week, the company filed for Chapter 11 bankruptcy, saying it had $799.5 million in assets and nearly $491 million in debts.

Aventine, which has production capacity of 207 million gallons of ethanol per year, operates plants in Illinois and Nebraska. And Aventine’s bankruptcy won’t be the last in the ethanol sector. The ethanol producers are in a fundamentally untenable position: they are selling product into a market where gasoline demand is falling and corn prices are still relatively high.

What’s amazing is that Aventine and the other ethanol companies who’ve failed can’t make money even though Congress is giving them a fat subsidy — $0.45 per gallon – and a mandate that requires gasoline retailers to use 12 billion gallons of their product this year. By 2015, that requirement will increase to 15 billion gallons.

The huge mandates and subsidies for corn ethanol resulted in a spending binge on new production capacity, much of which now sits gathering dust. According to Ethanol Producer Magazine, 37 ethanol plants now are sitting idle. Those plants have total output capacity of 2.2 billion gallons per year. And of those 37 plants, at least 23 have been built since 2005.

The latest data from the Renewable Fuels Association shows that there are now 193 ethanol distilleries in the U.S. Thus, those 37 idled plants represent 19% of all the ethanol plants in the country. On a production capacity basis, 17.8% of America’s ethanol capacity is now on the sidelines.

But even with that much capacity sitting idle, and even with the mandates and subsidies, ethanol still can’t compete. Look at this chart (http://www.neo.ne.gov/statshtml/66.html) from the state of Nebraska: It shows that going all the way back to 1982, except for a few months in 2008, the average rack price for ethanol in Omaha has been substantially more expensive than that of unleaded gasoline. Now look at the tabular data below the chart. It shows that in March, ethanol was selling for $1.62. Meanwhile, unleaded gasoline was selling for $1.40.

Even if you subtract the $0.45 federal subsidy for ethanol from the $1.62 price, resulting in a cost to wholesalers of $1.17, ethanol is still more expensive than gasoline on a per-Btu basis. Why? Ethanol contains just two-thirds of the heat energy of gasoline. Therefore to match the energy content of 1 gallon of gasoline, you need 1.33 gallons of ethanol. And the total cost of that fuel would be $1.55. ($1.17 * 1.33 = $1.556). That’s $0.14 more than the listed cost of gasoline.

Thus, the reality is that for buyers in Omaha and many other parts of the country, the real cost of ethanol remains higher than that of gasoline. Given that reality, it’s no wonder that companies like Aventine are going down the drain.

But here’s the truly depressing part: in announcing their bankruptcy, Aventine is still banking on government mandates and subsidies to be viable. In a statement on the company’s website, Aventine’s president and CEO, Ron Miller, said the “ethanol industry has sound long-term prospects, and we anticipate a strong rebound as the government imposed biofuels mandate continues to increase.”

Alas, Aventine’s demise was easily predicted. And in a bit of kismet, at about the same time that the company filed for bankruptcy, the Congressional Budget Office released a report which said that the corn ethanol scam is responsible for a significant portion of the recent increase in food prices. The agency said increased use of corn for ethanol production accounted for 10 to 15% of the surge in food prices that occurred between April 2007 and April 2008.

The CBO study now brings the tally of reports which have made a direct connection between the corn ethanol scam and higher food prices to 16.

ROBERT BRYCE’s latest book is Gusher of Lies: The Dangerous Delusions of “Energy Independence” which just came out in paperback.