Ethanol boom may stifle U.S. gasoline demand

By Timothy Gardner and Rebekah Kebede - Analysis

NEW YORK (Reuters) - While debates heat up on whether ethanol will ever be "green," one aspect of the alternative fuel is becoming clearer: explosive production is stifling an established driver of oil markets -- U.S. gasoline demand -- and could lead to lower prices at the pump.

The ethanol boom comes just as U.S. oil refiners, who had been struggling for years to keep up with rising fuel demand in the world's largest energy consumer, begin to catch up by adding surplus capacity. Together, these factors could help reverse gasoline supply tightness that has driven fuel prices higher, particularly during the petroleum rally of the last five years.

"Ethanol blending could help ease U.S. refining bottlenecks and that could be ultimately reflected in lower prices at the pump," said Eric Wittenauer, an analyst at AG Edwards in St. Louis.

U.S. gasoline demand growth has averaged about 1.3 percent annually from 1971 through 2007, but the growth rate has slowed in recent years, even as the population continues to grow, falling to 0.6 percent in 2007. Early this year gasoline demand growth has only been 0.4 percent, the government said on Wednesday.

Meanwhile, ethanol output has rocketed as the U.S. government touts it as a fuel that cuts greenhouse gas emissions and weans the country off foreign oil. Washington offers producers hundreds of millions of dollars in incentives and gives blenders a 51-cent-per-gallon credit for mixing the fuel into gasoline.

Critics say ethanol made from corn has boosted food prices and that the fuel does not cut greenhouse gas emissions much over the life cycle of making and burning it. But the industry grows nonetheless as new markets open, such as the U.S. Southeast, and blenders invest in terminals across the country.

The subsidies have made ethanol cheaper than gasoline and a much sought after component for blending into motor fuel at levels of up to 10 percent for all cars, and up to 85 percent for increasing numbers of specially tooled "flexible fuel" vehicles.

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