Cheap Oil’s Making It Tough for Ethanol to Pay the Bills – Bloomberg Business

Source: By Mario Parker, Bloomberg • Posted: Friday, August 21, 2015

Cheap crude oil may make it hard for ethanol companies to pay their bills on time.

The lowest oil prices in six years are hitting biofuel producers two ways: They’re making ethanol less attractive as a blend for gasoline, and emboldening the arguments of petroleum backers who say the U.S. law mandating consumption of the fuel alternative is obsolete, Standard & Poor’s Ratings Services Inc. said in a report Wednesday.

“The most noteworthy trend in the energy industry during the past year has been the precipitous decline in commodity prices, and chief among these has been plummeting oil prices,” Michael Ferguson, a credit analyst at S&P, wrote. “The lower oil prices may present a difficult rationale for blending ethanol.”

Crude oil has fallen 57 percent in the past year to $40.80 a barrel on the New York Mercantile Exchange, the lowest since March 2009. Gasoline has plunged 42 percent and ethanol has dropped 31 percent.

Regulatory support has also waned. In May, the Environmental Protection Agency proposed reducing the amount of ethanol required to be mixed with gasoline from statutory levels set in 2007, citing changing driving habits and fuel use since then.

That’s not reason enough to abandon the policy, according to Growth Energy, a Washington-based trade group.

Price Uncertainty

“Cheap gas and cheap oil is never a certainty, and often it is the exception,” Tom Buis, chief executive officer of the lobby, said in an e-mailed statement.

The Renewable Fuels Association, also a Washington-based trade group, said the S&P report “is really out of step with the realities of the market place today.”

Low-priced crude oil lowers gasoline costs and makes ethanol less attractive for blending beyond government mandates. An additive, ethanol is used to boost gasoline supply and lower prices.

“Consumers are saying, ‘I’ve already got cheap gas, why do I need this ethanol?’” Ferguson, the report’s author, said in a telephone interview Wednesday.

Poet LLC in Sioux Falls, South Dakota, is the largest ethanol producer, followed by Archer-Daniels-Midland Co. in Chicago; Valero Energy Corp. in San Antonio; and Green Plains Renewable Energy Inc. in Omaha, Nebraska.

In the U.S., ethanol is made mostly from corn. Companies risk getting pinched between cheap oil, which caps how much they can charge for ethanol, and corn that’s subject to weather-related price spikes, according to the credit agency.

Ample supply and higher input costs threaten to “pressure” production margins for the rest of the year, Bloomberg Intelligence analyst Tobias Nystedt and James Evans said in an Aug. 7 report.

That, combined with cheap oil and policy changes, brews uncertainty, anathema to credit analysts, S&P said.