The US: Dependence on imports set to remain

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Recent floods in the Midwest have not only done untold damage to this year’s corn crop but also underscored the difficulties in meeting the Bush Administration goals of the US reducing its dependence on imports.

The US ethanol industry, after all, is drawn from corn, and one bad crop – as farmers face this year – cuts into alternative fuel production.

David Driscoll, Citigroup’s US food manufacturing analyst, says a string of small- to mid-sized ethanol producers could shut down over the coming months.

The flooding, he says, has pushed corn prices up sharply, leaving the vulnerable ethanol producers running at substantial losses against cash costs.

This is putting pressure on the meat, dairy and poultry producers who rely on corn for feedstock. These companies are urging regulators to re-examine ethanol mandates, which are tightening limited grain supplies and forcing a run-up in feedstock prices that threatens their livelihoods.

“Ethanol will prove to be a very insecure fuel source,” says Amy Myers Jaffe, energy expert at Rice University. That does not mean the US should stop making it. The energy industry is convinced the country needs to tap whatever sources it can, given continued growth in global demand.

“We are going to need every conceivable source of energy to meet worldwide demand,” says Kevin Shaw, a partner focusing on energy matters for Mayer Brown, the law firm. Every source, just like the traditional fuels of oil and gas, has its difficulties.

Ethanol, for example, draws on a food source, uses much energy to create the fuel, and the feedstock is vulnerable to flooding.

Wind producers must find an efficient way to distribute energy from its source, in outlying areas, to urban centres where it is needed.

Solar technology remains expensive. Nuclear energy is constrained by waste disposal issues and public fear.

“Each one of those is going to play a role,” says Mr Shaw. Yet he, like many in the industry, does not believe that, even with all these sources, the US will be able to cut its import dependency significantly in the next two decades.

The US is already the world’s biggest consumer of energy, and demand continues to grow.

That is why Ron Litterer, president of the National Corn Growers Association, insists the country should not give up on ethanol. If there was no ethanol, he says, the price of petrol could be 15 per cent higher.

The US uses about 9bn gallons of ethanol a year, and that figure is to grow to 15bn gallons by 2015. Nonetheless, to achieve the 36bn gallons a year that the Bush Administration wants by 2022 “will take tremendous advances”.

One of those would be in finding a way to make cellulosic ethanol. That would be welcome news to owners of the US’s 160 ethanol plants and the 55 under construction.

Bob Dinneen, president and chief executive of the Renewable Fuels Association, says the recent market conditions and floods have made things so difficult that construction on some of the planned plants is stalled. But he considers the slowdown temporary.

Even if it takes some time, Priscilla McLeroy, a director at Arthur D Little, the consultancy, says production from the oil and gas industry will not drop as sharply as some fear.

Private equity is sitting on a lot of cash, which is being funnelled into small companies being formed to get at fields the majors might consider insignificant.

Yet there is a caveat. Congress is so intent on reducing pump prices from the current $4 a gallon that it is considering a variety of measures that would undermine producers.

These include a windfall tax to siphon off some of the massive profits that companies are making on an oil price of $140 a barrel. Another idea is to prohibit the Secretary of the Interior from issuing new federal oil and gas leases to holders of existing leases who “do not diligently develop the lands”.

The industry is constrained in developing many federal leases by lawsuits brought by environmentalists or the limited equipment and contractors available at any one time.

Marc Smith, executive director of the Independent Petroleum Association of Mountain States, says such policies may be most harmful to the small, independent businesses that produce 82 per cent of the US’s natural gas and 68 per cent of its oil.

“These independent producers are a driving force behind our domestic energy supply and should not fall victim to the misdirected wrath of Congress,” says Mr Smith.

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