US ethanol sector faces grim prospects-USDA

By K.T. Arasu

WASHINGTON, Feb 26 (Reuters) - Hard times have hit the once-robust U.S. ethanol sector amid the economic recession, with as much as 15 percent of production capacity likely standing idle, USDA chief economist Joseph Glauber said on Thursday.

It was a sobering assessment of the fledging industry that was once bursting with optimism and financial gains as the country issued mandates on using the renewable fuel to reduce dependence on crude oil.

"The U.S. ethanol industry remains under significant financial pressure as the result of current economic conditions ...," Glauber told the annual USDA Agricultural Outlook Forum in Arlington, Virginia.

He said slowing gasoline consumption and lower prices have reduced incentives for blending ethanol in recent months.

Crude oil futures have tumbled from a record high above $147 a barrel last summer to around $45 on Thursday as the surge in prices triggered the backlash of reduced consumption.

The Energy Information Administration, the U.S. government's top energy forecasting agency, earlier this month cut its estimate for world oil demand in 2009 by 400,000 barrels per day, citing the slower global economy.

The EIA predicted that world oil demand this year would fall by 1.17 million bpd from 2008 to 84.70 million. That would be down from peak demand of 85.9 million bpd in 2007.

The state of the ethanol industry has been underscored by the second largest producer VeraSun Energy Corp VSUNQ.OB filing for bankruptcy protection in October due to high corn prices and a lack of financing.