Biofuels run into trouble: John Kemp

-- John Kemp is a Reuters columnist. The opinions expressed are his own --

By John Kemp

LONDON (Reuters) - Despite a promising start, the U.S. experiment with renewable fuels is facing a serious challenge next year. Falling gasoline consumption, lower pump prices and contradictions within the federal government programme are intensifying existing pressures on ethanol distillers and farmers already struggling to cope with over-capacity and collapsing margins.

ETHANOL ENTHUSIASM

Between 2000 and 2007, production of fuel ethanol quadrupled from 1.6 billion to 6.5 billion gallons, and the industry is on course to distil a record 9.3 billion gallons in 2008.

Ethanol production is not really economic at oil prices below about $60-70 per barrel (£40-47) (prices of grains and fats for ethanol conversion and processing costs are too high relative to oil). So the original boost to ethanol came from its use as an oxygenating additive in reformulated gasoline, rather than as fuel in its own right, when a number of states banned the use of

MTBE.

As oil prices breached $50 in late 2004 and continued to climb steadily higher over the next four years, ethanol's properties as a fuel suddenly became more attractive. Blenders began to use ethanol as a cheaper (partial) substitute for conventional oil-derived blendstocks in making gasoline.

Prompted by national security concerns and encouraged by lobbyists for the farm sector, U.S. legislators tried to accelerate the use of ethanol by mandating a minimum ethanol content for all gasoline produced or imported into the United States.