Although some producers of fermentation ethanol have temporarily shelved ambitious capacity expansion plans due to poor profitability, ethanol buyers need have little fear of shortages. Analysts say there is more than enough ethanol to go around, although logistics-related snags in the supply chain may occur from time to time. Prices of both fuel-grade (fermentation) and synthetic (petrochemical) ethanol have been on a wild ride over the past year, and more volatility is in the cards for this year, according to industry projections.

Late last year, about 5.6 billion annual gallons of new or expanded fermentation ethanol capacity was due for completion in 2008, reports Nathan Schaffer, a fuels analyst with PFC Energy in Houston. Of that, he says, about a quarter has been "put on hold or taken off the boards" since the start of the fourth quarter of 2007. Schaffer attributes the stalled projects to "squeezed margins" in the industry caused by rising prices for corn, the main fermentation ethanol feedstock, plus ethanol prices that dropped through much of 2007.

Some of the ethanol projects that are on the back burner could be quickly reactivated if economic conditions improve, says Rick Kment, a biofuels analyst with DTN in Minneapolis. Though, given the "decreased expectations" for profits in the industry, he doubts whether many of these delayed projects will go on-stream for the rest of the year.

Even if some producers have gotten cold feet, fermentation ethanol production capacity is growing dramatically. Capacity in the U.S. stood at about 8 billion gal/year at the beginning of 2008, estimates Andy Lipow, president of Lipow Oil Associates, a Houston-based market research firm, and should jump to around 13 billion gallons by the end of the year. More domestically produced ethanol will be supplemented by imports of the commodity from Brazil and the Caribbean this summer, says Lipow, due to a "very good sugar harvest" in those regions. (Sugar cane is another source of fermentation ethanol.)

Overall, "the ethanol capacity that's coming on-stream is kind of creeping ahead of demand," says R. Jeffrey DeReamer, president of EthanolMarket.com, a market research firm in Lexington, Ky. "So supply is not going to be an issue for buyers this year." Lipow agrees that ethanol supplies will be ample this year, though "sporadic" delivery problems might occur due to railcar shortages or other transportation bottlenecks.

Karl Doenges, president of CleanFUEL Distribution of Georgetown, Texas buys fuel-grade ethanol for blending with gasoline. He has had "no problems" finding the ethanol he needs for his Southern and Southwestern U.S. market but says logistical issues have cropped up for buyers in other sections of the country. One such region, he notes, is California, where legislative wrangling over vapor-recovery standards for E85 fuels (a blend of 85% ethanol with 15% gasoline) has stalled development of a large-scale ethanol delivery infrastructure.

Logistical issues are not a concern for ethanol buyer Jay Stoflet, director of retail marketing at Renew E85, an Oshkosh, Wisc.-based company that owns and operates fuel stations throughout Wisconsin that dispense ethanol-gasoline fuel blends from self-service pumps. Stoflet buys ethanol directly from producers in his company's immediate service area. Doing this, he says, minimizes delivery costs and is cheaper than buying through the wholesalers and retailers that sell most ethanol in the Midwest. Stoflet has no supply issues with ethanol.

But Renew E85's business model is unusual, as few ethanol purchasers have downstream operations in such close proximity to their ethanol suppliers. As the distance between the purchase site and the consumption site lengthens beyond a few hundred miles, says Stoflet, any economic advantages from dealing directly with producers is rapidly eroded by transportation costs.

Meanwhile, demand for ethanol keeps expanding at a dizzying pace. About 6.2 billion gallons of ethanol were consumed in the U.S. in 2007, a 15% jump over the previous year, according to the Renewable Fuels Association. Demand should be accelerated by recently enacted federal legislation, specifically the Energy Independence and Security Act, signed into law in December, which mandates a target ethanol production in the U.S. of 36 billion gal/year by 2022.

Demand has also been boosted by plummeting prices of fuel-grade ethanol, which dropped below $1.60/gal on the Midwestern spot market in early October, compared to about $2.40/gal at the beginning of 2007. That opened an unusually wide price differential between gasoline and ethanol, says Schaffer, which encouraged gasoline suppliers in the Southeastern U.S. to blend ethanol into their stocks, even though it wasn't mandated by law, because the blends were cheaper to produce than pure gasoline.

Demand for ethanol has also gone up in certain areas of the West the past few months, notes Lipow. The reason, he explains, is that metropolitan areas such as Phoenix, Las Vegas and Denver require gasoline-ethanol blends for motor fuels during the winter months to cut down carbon monoxide emissions.

All these short- and long-term fluctuations in supply and demand have combined to create a complicated price picture for ethanol. As the low prices of ethanol in 2007 boosted demand of this commodity in fuel blending, prices of fermentation ethanol began to rise again. But since about December, tags have been heading downward, a trend Schaffer attributes to the new ethanol capacity that has recently come on-stream. Meanwhile, prices of synthetic ethanol, which is derived from ethylene, a petrochemical, have generally followed the upward trajectory of crude oil in recent months.

Future ethanol market volatility will be caused by supply and demand being out of sync. Schaffer says increased demand will likely send prices higher, spurring stalled ethanol projects to go forward, thereby increasing supply. This added capacity will "overshoot the mark," bringing prices down again and setting the stage for the next price cycle. The amount and timing of ethanol imports is the wildcard in this equation, Schaffer says, and could affect the magnitude of price swings.

See also: Ethanol shakeout is due