Food vs fuel: the war continues

The debate over fuel vs food is once again rearing its head in a big way with Coca-Cola even entering the fray, while troubles at EV maker Fisker aren’t dampening enthusiasm within the industry.

The ‘food vs. fuel’ debate over ethanol is rearing its head again in the US, prompted by what could be the worst drought since 1956 and coinciding with a fierce presidential campaign being waged largely in the heartland.

At issue is the federal Renewable Fuel Standard, which requires refiners to blend 13.2 billion gallons of ethanol into the US fuel supply this year and 13.6 billion gallons in 2013. Republicans and Democrats from outside the Corn Belt are petitioning the Environmental Protection Agency (EPA) to suspend or lower the blending mandates in the face of record high corn prices. The director general of the United Nations Food and Agriculture Organization argued the RFS drives up corn costs and, in turn, boosts food prices, both in the US and globally.

The oil industry has long despised the RFS – a volume based blending mandate – as it essentially compels them to buy ethanol at whatever price available. Ironically, last week, the mandate appeared to be serving them well as they were able to purchase ethanol at a $US0.49 per gallon discount to gasoline blendstock in New York Harbour.

That gap was partly attributable to imports with the US bringing in 93,000 barrels of ethanol per day in the week ending August 10 compared with nil for the same period a year earlier. Imports - which have seen a sharp rise in the last few months - are likely to continue to increase, Deutsche Bank said in a report last week. Domestic production has however fallen in the US as companies grapple with the high cost of corn. In the first two weeks of August ethanol production was 3 per cent lower than July's average and 10.5 per cent lower than June's average.

The Obama administration is showing little sign of backing away from the RFS. President Obama spent half last week campaigning in the largest corn-producing state of Iowa and made no major comments on the matter. A review of the program is appropriate but a waiver may bring long-term harm to ethanol investment and have little significant impact on food prices, US agriculture secretary Tom Vilsack said last week. Bloomberg New Energy Finance does not expect any major change to the RFS prior to the November elections.

Separately, a coalition of organisations representing grocery stores, food producers, and the oil industry were dealt a setback after a federal court rejected their effort to block the EPA from moving the "blend wall." The move affirms the agency's earlier action to allow gasoline containing 15 per cent ethanol in the tanks of certain US vehicles by waiving current fuel additive restrictions. The appeals court ruled that the suit brought by the groups, which represent Coca Cola, Tyson Foods, and others, had no standing.

Similarly, Brazil is also considering increasing the amount of ethanol it allows to be mixed in gasoline. The blend is set at 20 per cent there but now there is talk of boosting that to 25 per cent by the end of the year. Last week, energy minister Edison Lobao said the government was in talks with producers. "If they can give solid guarantees of supply, we have all the interest in increasing the mix," he said.

The week's other major biofuels headline somewhat surprisingly came from Finland where Neste Oil and Stora Enso said they had scrapped plans to build a €500m ($A590 million) renewable diesel plant after failing to secure European Commission funding.

Back in the US, electric vehicle maker Fisker drew the ire of two Republican Senators for having only 16 employees on its rolls. The company at one time had projected creating 2,500 direct and indirect jobs by re-developing a manufacturing plant in Delaware with the assistance of $US529 million in US Energy Department loans.

Despite high wattage support from customer and investor Leonardo DiCaprio, Fisker has faced repeated technical challenges with its $US103,000 Karma sedans. This week, the company "voluntarily elected to conduct a recall" to fix flawed cooling fans which caused a slow-burning fire in a customer vehicle on August 10.

About 1,900 Karmas have been delivered to customers so far but the cost of replacing the fans is unlikely to have a material impact on earnings, the company said. The plug-in hybrid luxury carmaker's vehicles were recalled previously by battery supplier A123 Systems in March to replace flawed packs and in December for a software glitch. Separately, Fisker last week tapped Tony Posawatz as its new CEO. Posawatz previously helped develop the Volt at General Motors.

Fisker's troubles hardly appear to be dimming enthusiasm for electric vehicles among major carmakers. Ford, the second largest US automaker, said its electric-vehicle engineering staff now numbers more than 1,000. It expects hybrids, plug-in hybrids and all-electric cars to account for up to a quarter of all its new vehicle sales by 2020 from less than 3 per cent last year. The company is debuting five battery-powered models this year.

EU carbon

European carbon allowances, or EUAs, for December 2012 delivery advanced last week, as hedging demand from power utilities drove up prices amid thin trading. EUAs gained 6.9 per cent on the week, closing at €7.71/tonne, compared with €7.21/t the previous week. Traded EUA volumes were again meagre, about 24 per cent below the 15-day moving average, with many traders likely on holiday. Demand was driven by utilities in need of allowances to cover future emissions. EUAs tracked German power prices early in the week, reaching a weekly high of €7.80/t on Friday morning on news that GDF Suez’s Doel-3 nuclear reactor would be unlikely to restart by October following the discovery of cracks. United Nations Certified Emission Reductions, or CERs, for December 2012 fell 1.0 per cent last week to close at €2.90/t.

This article was originally published by Bloomberg New Energy Finance. Republished with permission.