Ethanol growth based on economics, not government

By Mark Weinraub

CHICAGO (Reuters) - Growth in ethanol in 2008 will be driven by demand from new markets that want to capitalize on the economics of alternative fuels, not by government decrees, Bill Honnef, senior vice president, strategic initiatives, at VeraSun Energy Corp. VSE.N said on Monday.

"I think we look at the past as an indication of what will happen in the future," Honnef said in a conference call during the Reuters Global Agriculture and Biofuel Summit. "It was the discretionary markets that pulled the ethanol into the marketplace."

A run-up in crude oil futures in the past year caused gasoline prices to surge and helped provide an economic incentive for refiners to boost their blending levels.

Discretionary blending of ethanol -- refiners' decision to mix ethanol with gasoline at levels beyond what the government requires -- rose by 50 percent during 2007.

"That was primarily driven by economics in the marketplace," Honnef said. "It was not driven by mandates, either at the state level or federal level. That really is what is carrying the day for us today as we see the growth in the ethanol supply."

A new U.S. energy law signed by President George W. Bush late last month calls for the country to boost overall blending of biofuels five-fold to 36 billion gallons per year by 2022.

"The ethanol industry will continue to outpace the mandate baseline just like it has in the past," Honnef said. "Arguably, the Renewable Fuel Standard did not create any demand for ethanol. It basically put the underpinnings in below the industry in order to encourage investments and at least put a backstop in there."

Expansion into markets in the U.S. southeast will be the biggest development in ethanol in 2008, Honnef said. In previous years, ethanol markets were concentrated around Midwestern states in the U.S. Corn Belt.