Iowa Public Television


Biofuel Bubble May be at Risk of Bursting

posted on June 16, 2006

Battered by soaring gasoline prices and rising interest rates, U.S. consumers cut back sharply on their spending in May. **According to the Commerce Department, retail sales edged up slightly last month and would have been in negative territory had it not been for increases in gasoline prices. **Meanwhile, the Labor Department reported this week that its Consumer Price Index rose 0.4 percent last month. **Private economists said the news on inflation virtually guarantees the Federal Reserve will raise interest rates for the 17th consecutive time when it meets later this month. All of this week's economic reports noted that higher fuel prices are making an impact on the U.S. economy. And those who live and work in rural America know that America's "pain at the pump" is fueling a boom in alternative fuel production.

Biofuel Bubble May be at Risk of Bursting

The nation's largest producer of ethanol, Archer Daniels Midland, recently announced plans to double its investment to nearly $4 billion over the next few years on new ethanol and biodiesel plants. ADM officials say that demand likely will exceed government production mandates.

Meanwhile, shares of VeraSun Energy Corporation, the nation's second-largest ethanol producer, jumped more than 29 percent in their trading debut on Wednesday. But on Thursday, the stock declined 10 percent.

VeraSun operates plants in South Dakota and Iowa, and will use funds from the initial public offering to finance construction of two more corn-based ethanol facilities in the Upper Midwest.

The U.S. biodiesel industry also is enjoying rapid expansion, using soybean oil as its primary feedstock. Currently, the biodiesel industry has 265 million gallons of capacity in place or under construction, and predicts that within 12 to 18 months, 2 billion pounds of soybean oil and other feedstocks will be converted into biodiesel.

Rapid growth aside, some worry the biofuel bubble could be at risk of bursting in the short term. According to a report released this week by Alternative Energy News Source, the U.S. corn ethanol industry likely faces challenges due to corn supply concerns, foreign imports, and increased competition from other feedstocks.

And, experts worry that if crude oil prices decline and feedstock and soybean oil prices rise, the price of biodiesel will be less competitive.


Tags: biofuels news renewable fuels