Obama vehicle plan another pothole for ethanol

A process operator pours ethanol into a bottle at the GreenField Ethanol plant in Chatham, Ontario, April 10, 2008.

NEW YORK (Reuters) - President Barack Obama's tough fuel economy program for vehicles could put another damper on the struggling ethanol business, because the alternative fuel packs a lower energy content than gasoline.

Obama on Tuesday introduced the most aggressive proposal yet to boost U.S. auto fuel economy standards -- a bid to reduce vehicle emissions of climate-warming gases. [ID:nN19424837]. The proposal would require passenger vehicles to average 35.5 miles per gallon by 2016.

"It's going to be a headache for the ethanol industry," said Daniel Flynn, an analyst at Alaron Trading in Chicago.

Ethanol producers have intensified efforts this year to boost demand for the fuel as stockpiles rise.

They have pushed for wider development of service station pumps that offer a blend of 85 percent ethanol and 15 percent gasoline. The fuel is burned in specially made "flex-fuel" vehicles that can also run on pure gasoline.

But "flex fuel" cars typically get 20 to 30 percent fewer miles per gallon when they burn E85 due to ethanol's lower energy content, according to the Web site www.fueleconomy.gov.

The industry has also called on the government to hike the level of ethanol in gasoline burned in normal cars to 15 percent from 10 percent.

Unless ethanol makers convince the struggling auto industry to make specially-built engines that overcome the mileage difference, Obama's plan could be another blow to the industry that had been a big part of former President George W. Bush's strategy to begin to wean the country off foreign oil.

PORTFOLIO OF ALTERNATIVES

Over the past year ethanol distillers have battled record prices for corn, their main input; overcapacity; tight credit; and anemic fuel demand. This week, subsidiaries of Pacific Ethanol became the latest in a long string of ethanol plants to file for Chapter 11 bankruptcy protection.

"It looks like they are going to lose out," Sarah Emerson, director of consultant group Energy Security Analysis Inc in Boston, said about the effect on the ethanol industry of the Obama program. "I think the fuel economy (plan) trumps the biofuels."

She said ethanol should remain popular near its Midwest production center and be one of a portfolio of alternatives for cars. Those include alternative fuels such natural gas and biodiesel as well as new technologies such as hybrid cars, plug-in hybrids, and battery-powered vehicles.

But, she said: "We may see less movement" for vehicles that use 85 percent ethanol. Federal mandates for mixing more ethanol into gasoline also may need adjustment because of the slow pace of developing next-generation cellulosic ethanol, which can be made from non-food crops like grasses and fast-growing trees.

OCTANE BOOST

The leading U.S. ethanol industry group praised Obama's plan, saying advanced engines could help ethanol-fueled cars go nearly as far as gasoline-powered vehicles.

"New engine technologies are in development that will capitalize on the increased octane available from ethanol blended fuels, reduce any mileage difference that may exist, and increase engine performance and efficiency for future automobiles," Bob Dineen, the president of the Renewable Fuels Association, said in a release.

But so far development of those technologies has been limited and it is uncertain whether those engines will become common any time soon.

(Reporting by Timothy Gardner; Editing by David Gregorio)