The worldwide drop in oil prices has pulled the rug out from under the nation's heavily subsidized alcohol-fuels market, forcing producers to slash their prices and take sharply reduced profit margins to stay competitive, according to industry officials.
This is spelling hard times for a young $800-million-a-year industry whose existence has been almost entirely dependent on federal and state tax breaks. Coming when some states have started to peel back those subsidies, the jolt of plunging oil prices has undermined the already precarious economics of alcohol fuels virtually overnight.
"The consensus of our members is that the economics of alcohol are now dead," said Jack Blum, counsel to the Independent Gasoline Marketers Council. "There's no prospect of making it work. . . . When the price of gasoline goes below the price of alcohol with the subsidy, there's no reason to bother with it any more."
In the past three to five weeks, bulk gasoline prices have plunged about 20 cents to about 60 cents a gallon. As a result, alcohol-fuels producers have been forced to make identical price cuts for their fuel-grade ethanol without any corresponding reduction in their production costs.
The upshot has been a profit squeeze that eventually could shut down marginal producers, raising the prospect of millions of dollars of defaults on federal loan guarantees and a further consolidation of the industry in the hands of a few big companies, according to industry and federal officials.
"Everybody in this industry is hurting right now," said Luke Staengl, the owner of Floyd Agriculture Energy Co., an ethanol distilling plant in Floyd, Va., and president of the Virginia Ethanol Association.
"Our margins have already shrunk to about half of what they were," Staengl said. "At these prices, it's going to be impossible for many of us to continue in business."
Commonly known as gasohol -- a mix of one part corn-derived ethanol and nine parts gasoline -- alcohol fuels were among a number of synthetic fuels that were promoted during the height of the energy crisis in the 1970s. But because the economics of alcohol always were debatable -- some studies contended it never would be competitive with gasoline -- the primary impetus came from the Farm Belt in the Midwest where gasohol was touted as a new market for corn.
Marching under the energy-saving banner, Farm Belt lobbyists and corn-processing firms such as the giant Archer Daniels Midland Co. of Decatur, Ill., persuaded Congress and state legislatures to enact a series of tax breaks that caused ethanol sales to soar in recent years. Annual domestic production, which totaled no more than 10 million gallons in 1978, topped 550 million gallons last year, giving gasohol about 7 percent of the total U.S. gasoline market and pumping an estimated $849 million into the depressed farm economy, according to a study conducted last year for the Indiana Corn Growers Association.
As recently as a few months ago, moreover, industry officials were envisioning even brighter times in the future. The Environmental Protection Agency's order phasing out the use of lead in gasoline was seen as a major boon for ethanol because it is considered among the most environmentally sound substitutes for lead as an octane booster in gasoline.
But industry forcasts were made obsolete last month when spot oil prices took a nosedive, taking gasoline prices with them. Unless that trend reverses shortly, some analysts say the alcohol-fuels industry, instead of growing, actually will contract as high-cost producers find it increasingly difficult to compete.
"You could lose 10 percent of your productive capacity by April 15," said Fred Potter, president of Information Resources Inc., an alcohol-fuels research group based in Washington.
The oil-price blow comes at an especially hard time for the industry, because a growing number of states are concluding that the cost of subsidizing gasohol is too high and have begun peeling back their tax breaks. At present, gasohol only has been profitable at all thanks to federal and state tax subsidies of about 10 cents a gallon -- exemptions of six cents a gallon off the federal gasoline tax and an average of four cents a gallon off state gas taxes in about 30 states. Taking 10 cents off the price of a gallon of gasohol at the pump translates into a $1-a-gallon subsidy for the one-tenth ethanol component sold by producers to gasoline marketers.
But this year, states such as Kentucky, Colorado, Idaho and Maryland are scheduled to phase out their tax breaks entirely. The Virginia Senate recently voted to eliminate that state's tax break on June 30 and replace it with a less lucrative direct payment to producers.
This has alarmed marginal producers such as Staengl, whose 10 million-gallon-a-year ethanol distilling plant, about 35 miles southwest of Roanoke, was among the first in the state and has thrived solely because of the state's six-cent-a-gallon tax break. "God only knows what we'll do come June 30," he said.
Yet some in the industry profess to see help down the road. The market for imported Brazilian ethanol -- considered a major threat by big producers such as Archer Daniels -- has virtually dried up. And Don Evans, chief operating officer of New Energy Co. of Indiana, in South Bend, noted that corn prices are expected to drop about 30 cents a bushel by this fall, shaving the equivalent of 15 cents a gallon from his firm's cost of production.
More importantly, the demand for lead substitutes in gasoline is still there and oil refiners eventually will be forced to turn to ethanol to fill their needs, Evans said. What this means, however, is that the essential rationale for alcohol fuels has been transformed, from oil substitute to gasoline extender.
Meanwhile, the performance of New Energy and other producers is being watched by federal officials who approved loan guarantees for the plants under programs enacted during the gasohol push of the 1970s.