Is an ethanol supply glut coming in the second half of 2007? Some analysts are predicting that a rash of new ethanol production plants coming online in late 2007 will increase production enough to produce a major surplus. According to the Renewable Fuels Association, there are 120 ethanol biorefineries nationwide with a capacity to produce nearly 6.2 billion gallons annually. Additionally, 77 biorefineries are under construction and eight are expanding which will add more than 6.4 billion gallons of new production capacity by early 2009.

Bank of America analyst Eric Brown wrote a report that he expects "the relentless supply of new ethanol production capacity will lead to a 70% decline in margins by 2009." Brown's report, titled "The Ethanol Floodgates Have Opened," resulted in his downgrading ratings on several ethanol-related stocks. June 15 saw the latest opening (at press time) of another ethanol plant, this one in Janesville, Minn., courtesy of U.S. Bioenergy.

However, a commodity's supply is based not only on production, but also shipping, and major questions remain around whether the U.S. transportation network can handle the increased supply. In June, Lehman Brothers analysts estimated an ethanol surplus of about 1 million gallons/day will start in the second half of 2007 due to the ethanol plant construction boom. But Lehman analyst Michael Waldron said transportation bottlenecks could be the deciding factor. "The supply is coming online and there isn't really an efficient way to get it to the demand centers on the East and West Coasts," he said in a recent report.

The Wall Street Journal reported in June that the "lack of infrastructure for distributing the fuel could make it difficult for the supply to reach new markets, particularly the U.S. Southeast. Unlike gasoline and other refined products that are transported by pipelines from crude-oil refineries to terminals, ethanol is shipped largely via rail, primarily from the Midwest."

Those concerns were echoed in a recent report from the Government Accountability Office, which said ethanol supply may be limited by the rail industry's ability to add capacity. "Existing biofuel distribution infrastructure has limited capacity to transport the fuels and deliver them to consumers. Biofuels are transported largely by rail, and the ability of that industry to meet growing demand is uncertain," the report says.

U.S. BioEnergy’s ethanol plant in Ord, Neb.

"Then you have the logistical issues. You can't put it in an existing pipeline, so you have to build a special pipeline so it has the right gaskets. You have to spend $30,000 per retail station to build a separate tank and a separate pump for the ethanol for E85...Who's going to pay for that?"

The Wall Street Journal also reports that a potential oversupply of the fuel could mean a major shakeup for the growing ethanol market. "Ethanol plants, which have sprouted up across the U.S. over the past two years, are ripe for the picking, as leaders begin to emerge in the renewable-fuels sector."

Another major question mark in the energy supply chain will be how the increased use and supply of ethanol impacts the number and capacity of oil refineries in the U.S. and, eventually, the price of gas. There are some plans for new oil refineries (see sidebar) in the U.S. Some analysts feel that plans for any increase in refinery capacity may be in question—for better or worse. The Associated Press reports that "Oil industry executives no longer believe there will be the demand for gasoline over the next decade to warrant the billions of dollars in refinery expansions—as much as 10% increase in new refining capacity—they anticipated as recently as a year ago." In the past year (including President Bush's now-famous call for ethanol in his State of the Union), oil companies have scaled back refinery expansion plans by nearly 40% with more cancellations expected if Congress passes legislation now before the Sensate calling for 15 billion gallons of ethanol use by 2015 and more than double that by 2022, say industry and government officials.

With the anticipated growth in biofuels, "you're getting down to needing little or no additional gasoline production," Joanne Shore, an analyst for the government's Energy Information Administration told the Associated Press. In the same report, Chevron Corp. vice chairman Peter Robertson said the energy giant is reviewing its long-term refinery plans. "Why would I invest in a refinery when [the Government] is trying to make 20% of the gasoline supply ethanol?" On the other side, Ron Lamberty of the American Coalition for Ethanol, tells the AP that all the talk about biofuels threatening gasoline production is the "latest attempt to blame ethanol on Big Oil's failure to meet our energy needs."