Government-encouraged efforts to ramp up US ethanol production, part of a bid to diversify US energy supplies, are succeeding, but some analysts fear a glut may be developing for the biofuel.
The boom in ethanol production, fueled by a government tax breaks and a desire to develop home-grown fuel supplies, has caused some industry analysts to wonder if the market is a bubble in the making.
Some energy analysts like Antoine Halff at Fimat are asking if it could be the "end of the honeymoon" for ethanol.
Investment in ethanol-producing plants has increased dramatically in a market still in its infancy in the past year, helped by attractive margins and cheaper costs compared to oil refineries.
Changes in environmental safeguards governing the composition of gasoline has also required refineries to start boosting output of ethanol to replace methyl tertiary butyl ether.
Ethanol output has also been encouraged by sharp spikes in gasoline prices, which have breached US$0.80 per liter in most of the US.
According to the Renewable Fuel Association, there are 120 ethanol "biorefineries" operating across the US with a capacity of some 23.4 billion liters per year.
Seventy-seven new biorefineries are currently under construction, with eight plants being expanded, which is expected to double overall capacity by 2009.
But the infrastructure, for drivers to fill up their cars at an ethanol-supplying fuel pump for example, is not keeping pace with the supply side, analysts say.
"Under current logistical conditions, the US ethanol market may be nearing saturation," Halff said.
Other analysts agreed.
"You don't have a large enough market at the service stations," said James Williams, an energy market analyst at WTRG Energy.
Market observers say that ethanol accounts for more than 5 percent of all US gasoline output.
"The US market capacity to absorb fast-rising ethanol production is limited, and supply appears set to catch up with demand," Halff said.
Analysts also point out that most of America's ethanol production is heavily concentrated in rural Midwest farm states, but that a lot of the nation's gasoline demand is based along the heavily populated east and west coasts.
"Because ethanol-blended gasoline cannot be shipped by pipeline, the marketing of ethanol faces great transportation constraints," Halff said.
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