By Marcia Zarley Taylor
DTN Executive Editor

CHICAGO (DTN) -- A major energy bill may be bogged down in Congress, but even if it fails, the Bush administration is forging ahead with a presidential promise to mandate 35 billion gallons of renewable fuels within 10 years, industry speakers told attendees at the National Grain and Feed Association meeting in Chicago Tuesday. The proposed regulations, which will be issued by the Environmental Protection Agency as early as January 1, are drafted and have only been sidelined until it's clear how renewable fuels fare on Capitol Hill.

"People at EPA think it's crazy to mandate such a large volume of renewable fuels," Mike Leister, fuels technology manager for Marathon Petroleum Co. in Findlay, Ohio, told DTN. "But they are under orders from the White House to go ahead."

Alternatives like cellulosic fuels have yet to be proven, and even optimists within the corn industry believe the corn industry can supply only about 15 billion gallons of corn-based fuels. But by acting now, the administration could fulfill the president's State of the Union promise to reduce reliance on imported oil. In addition, the U.S. Supreme Court ruled earlier this year that EPA must regulate carbon dioxide as a pollutant under the Clean Air Act. To comply, the Bush administration plans to promote low carbon transportation fuels to bring emissions into compliance. Traditional ethanol, produced with natural gas, reduces carbon emissions by about 13 percent to 20 percent compared to gasoline.

"EPA has tremendous authority when there's a finding of endangerment (to public health)," said ethanol consultant Marty Ruikka, president of PRX Geographic in Chelsea, Mich. "We could get a biofuels program and CAFE standards without a vote in Congress."

Ruikka compared the Supreme Court ruling on carbon dioxide to the landmark abortion ruling Roe v. Wade. "It's a life changer" and is already the law of the land, he said. "When the Supreme Court rules, there is no where to go for an appeal."

Meanwhile, the ethanol industry remains in the throes of a supply glut, and profit margins may not recover for more than a year even with a four- or five-fold increase in the RFS, both Ruikka and Leister said. Ruikka estimated that ethanol plants now under construction will add 3.5 billion gallons of capacity between now and the end of 2008.

If blenders can use only a maximum of 10 percent ethanol in all U.S. gasoline, the U.S. only needs another 16 ethanol plants with 100 million gallon capacity, he said. However, he noted that more than 142 projects in the Corn Belt have applied for air permits, and DTN is tracking over 200 projects altogether.

The rush to construct plants means lenders will likely pull financing and "most of them won't get built," Ruikka said.

That's not to say that ethanol's long-term outlook won't recover, especially as blenders find ways to incorporate more into the conventional fuel supply. Ethanol prices have dipped so far that the oil industry now considers it a low-cost component in gasoline. More than half of the gasoline in the U.S. blends some ethanol in it and blenders can make about 50 cents per gallon by adding ethanol to their mix.

EPA also could expedite ethanol consumption by permitting blends above 10 percent in the nation's fuel supplies. "The problem isn't automobiles, it is small engines like lawn mowers and chain saws that can't adjust automatically," Leister said. Auto manufacturers would bless higher then 10 percent blends in the car fleet, he believes, if they are exempted from warrantees on the engines. But when small engines like chain saws overheat, they can catch fire. Even so, he expects EPA to bend to pressure to raise the 10 percent blending limit and worry about the consequences later.

In biodiesel, the outlook is even more challenging than ethanol, with the U.S. utilizing only one third of its biodiesel capacity and another 1 billion gallons of production capacity under construction. "Biodiesel production stops being profitable when soybean oil is 36 cents," Ruikka said. "It's 40 cents now. I don't see any future where soybeans used as biodiesel makes sense."

Marathon's Leister agreed. By his estimates, it cost $4 per gallon to produce biodiesel from soybean oil, and that is after a federal subsidy and with no profit. "You wonder how they could be building more," he said.

Marcia Zarley Taylor can be reached at marcia.taylor@dtn.com

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