That might offer solace for devotees of corn on the cob and for tortilla-eaters and portends cheaper bratwurst. There is, however, an economic anomaly to be researched.Most industry analysts remain optimistic about ethanol, especially if the government mandates more of its use amid rising petroleum prices. But there's growing concern that too many ethanol plants are being built as investors rush to capitalize on the trend.
In the past six months, reports have surfaced about aggressively scheduled groundbreakings, as well as stalled and poorly planned ethanol projects, according to analyst Eitan Bernstein with FBR Research.
By 2012, the government-mandated demand for ethanol will be 7.5 billion gallons a year. By many estimates, the United States will be able to meet that demand by the end of 2007, well ahead of schedule, according to Platts, an energy information service.
"Simply put, supply will seriously outpace demand," Platts wrote this month.
It's easy to identify on a chalkboard what the equilibrium industry size is. Reality is somewhat more messy. An industry is almost by definition going to be "overbuilt" if all entrants contemplating a profit at the industry's current size enter, if any one of those entrants is sufficient to absorb the remaining inframarginal rents. The "overbuilding" becomes more of a problem if the supply elasticity of new firms is large. Many of those entrants will spin their mistake as "positioning the firm for expected future growth." Your tax dollars are supporting that ethanol conversion, and it is likely that lawmakers will look for ways to mandate additional ethanol use, rather than write off the subsidies that fostered the extramarginal capacity as irreversible losses.Overbuilding happens in every profitable industry, said Alexander Samardzich, one of the two founders of Ace Ethanol LLC, the first plant in Wisconsin.
"I am sure there's going to be a time when our industry is overbuilt. It will be a survival of the fittest," he said.
No comments:
Post a Comment