Is there enough corn for Bush ethanol plan?

The administration is relying on another “safety value” — a technology to produce ethanol from the cellulose in corn stalks and other plants like switchgrass that can be produced more cheaply than corn. So far, this so-called “cellulosic” process is much more expensive than corn-based ethanol. Major research breakthroughs will be required to make it economically competitive.

"There quite a long learning curve in terms of proving the technology and bringing it into production," said Peter Gray, KPMG's head of corporate finance for energy and natural resources. "It’s still quite a long way from being economic."

Meanwhile, the surge in corn prices has raised the cost of producing ethanol. Higher prices for the natural gas — needed to generate heat to brew ethanol — has also gone up. That has some producers considering delaying or abandoning plans to build more capacity.

"We assume a lower completion rate for planned projects, as high feedstock costs are lowering implied returns which should cause some cancellations and deferments," Credit Suisse said in a recent research report to clients.

The report said that as recently as last July, investors could expect a return of as much as 35-40 percent. Since then, those estimated returns have shrunk to about 5 to 13 percent, according to Credit Suisse.

"The biggest reason that you are seeing projects being delayed has been the cost of building a plant has gone from $1 to $1.25 a gallon to $2 or $2.25," said Monte Shaw, executive director for Iowa Renewable Fuels Association.  "That dramatically changes the risk profile on some of these projects."

But the rise in corn prices has a silver lining. Higher market prices means that government price subsidies — used to provide farmers with a guaranteed return — have fallen. On Wednesday, the Congressional Budget Office said American taxpayers will save some $31 billion over the next 10 years, compared to previous estimates, due increased corn demand from ethanol producers.

The CBO now estimates that farm subsidies will cost $10 billion this year and the annual cost "will range between $8 billion and $10 billion over the next decade." That compares to $18 billion spent on farm subsidies in 2006.

MORE FROM OIL & ENERGY

Oil & Energy Section Front

Oil prices plummet to 13-month low Government warns of higher winter heat costs Gas below $3.50 for first time since April As economy dims, utility shut-offs are soaring Ike, Gustav to cost Entergy at least $1 billion Gas shortage continues to plague Southeast Gas falls almost four cents in last two weeks Southeast gas shortage squeezes retailers Southeast gas shortage keeps travelers home Price of gas continues climb started by Ike Oil & Energy Section Front   Add Oil & Energy headlines to your news reader: