Just a year ago, the number of ethanol plants being planned in the U.S. was “growing rapidly.” Now the industry has cooled.

Reuters reported early Wednesday morning that the demand for new U.S. ethanol plans will be “dead” until the middle of 2009.

The business news reporting service quoted the outgoing head of the refinery engineering firm Bateman Litwin, Shuki Raz. Raz said he had recently visited with the “top 15 banks and institutions financing the ethanol business and the view of everybody is 2008 is probably dead, mainly because of the general market but also because of the ethanol market.”

But by the spring of 2009, Raz said, ethanol will be back.

Ethanol was the fuel of the future just a few months back. Now it's going through a bit of rough patch, both in finance and perception. Ethanol has been blamed for rising food prices. (Rush Limbaugh was on a rant about ethanol and grocery prices last week.) Reuters reports, “Prices for commodities are steadily rising and top food industry executives are grumbling that costs will not fall as long as the U.S. government continues to subsidize corn growers for making ethanol.”

Ethanol is no longer seen as having environmental benefits. “Many environmentalists now believe biofuels contribute substantially to greenhouse gases — those responsible for global warming — instead of reducing them, as was previously believed, in part because farmers clear forest land to grow biofuel crops,” The Wall Street Journal reported. “Scientists say deforestation causes a large, quick release of carbon into the atmosphere when existing plant life is destroyed.”

The Rochester, Minnesota, newspaper asks plainly, “What Price Ethanol?”

Now the fast-expanding ethanol industry has had trouble making a profit. Plants are being cancelled or closed across the country.

Just a few minutes after Reuters released its story about the death of the ethanol industry until 2009, a two-year-old ethanol company in southeast Missouri declared bankruptcy. Ethanex Energy had been planning to build three ethanol plants and the company raised $20 million in capital in 2006. Ethanex stock once traded for more than $48 a share, but then the company couldn't raise the money it needed to complete the plants in a market that has largely cooled on ethanol. Shares of Ethanex were traded for nine cents on Tuesday.

The stories of financial upheaval in the ethanol business are mounting.

Pacific Ethanol in Sacramento reported huge losses, cost overruns, defaults on its bank loans and a general lack of cash to do business. (Microsoft's Bill Gates put $84 million into Pacific Ethanol.) The Sacramento Bee reported Pacific Ethanol was “battered by too much supply, too-expensive corn and too many increases in plant construction costs.”

POET Biorefining ethanol plant outside Chancellor, South Dakota.
Photo: Poetpics

Then reporter Dale Kasler wrote that the problem extended beyond Pacific Ethanol:

“Ethanol ““ hailed by some as a “green” fuel that would reduce America's dependence on foreign oil ““ is in a major slump here and nationwide. Across California, profit margins are vanishing, new plants are being canceled and some existing facilities are struggling. The state's first major plant, opened in Tulare County in 2005, has suspended operations.”

Okay, so things are tough now. But what about the future?

Well, according to Shuki Raz, demand for ethanol will rebound in a year. The Bee reports that “deep-pocket producers” like Cargill and Archer Daniels Midland are on the lookout for distressed ethanol plants they can pick up on the cheap.

Biofuels are playing “a critical role” in satisfying world demand for fuels, Fatih Birol, chief economist of the Paris-based International Energy Agency told the Wall Street Journal's Patrick Barta. Without them, “it would be much more difficult to balance global oil markets,” Birol said. Barta wrote that a slow-down in ethanol and biofuel production “would only tighten world energy markets — and further highlight the world's dependence on the ruels, especially as producers of traditional crude oil struggle to crank up their supply.”

And now that OPEC has decided to hold production of oil at current levels, Barta writes, this “can only mean one thing: With so many challenges ahead for increasing oil supplies, the world will have to get used to relying on biofuels — or find yet another alternative, at a time when there aren't many.”

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