Obama And The Biofuel Problem

One of the most intractable issues awaiting Barack Obama at the White House is the question of ethanol. On January 20th, 2009 the new president will have to turn some of his attention to the oil substitute, support for which was one of his campaign promises.

The idea came from George W Bush, who saw it as a way to reduce America’s dependence on oil-producing countries. By mixing corn-derived ethanol with oil to produce a form of “green” fuel called E10, which is cheaper than pure oil, he made an unexpected hit with motorists, farmers and ecologists alike, while at the same time reducing fuel imports. It seemed like a stroke of genius.

Obama had no choice but to support the initiative in order to win over the voters of the corn-producing and traditionally Republican Great Plains region. But in the wake of falling oil prices, the price of ethanol has also suffered a catastrophic collapse. In Chicago the price per gallon fell to $1.546 on December 12th, compared with $2.90 on June 27th.

Ethanol producers have been dealt a fatal blow by the price collapse, and 16 of them – including Verasun, the number two ethanol company in America – have already filed for bankruptcy. Under American law they are now exempt from honouring their contracts or paying their debts – and so, for example, do not have to pay for the corn they have received from farmers in the Midwest, who are already reeling from the fall in corn prices.

The president-elect will have to say whether he intends to rescue the farmers by providing them with aid, or to rescue manufacturers by authorizing the import of Brazilian sugar-cane ethanol, which is much more competitively priced.

In Europe we have not had to deal with the problems of the futures markets which have done so much damage to American ethanol. But even so, the price of agriculturally produced ethanol has fallen here too. There are reports that the French government wants to kill off its €0.27 per liter subsidy for “bio-ethanol” by 2012.

“Industry professionals are keeping their promise to supply 7% of French energy by 2010,” argues Alain d’Anselem, president of France’s SNPAA, the union of agricultural ethanol producers. “The government must also fulfill its commitments. We have reached a compromise which will not destroy this increasingly powerful industrial resource.” The subsidy will be capped at €0.21.

Ethanol may well continue to be a troublesome issue on both sides of the Atlantic.