Video: Oil execs defend market forces

updated 6/19/2006 12:26:40 PM ET 2006-06-19T16:26:40

With the market for corn-based ethanol booming, lawmakers from sugar-producing states are hoping that beet and cane growers can soon jump onto the renewable fuel bandwagon.

They cite the model of Brazil, which produces ethanol made from sugar cane. But critics, pointing out that sugar is much cheaper in Brazil than in the United States, question whether the economics of sugar-based ethanol would work in America.

"Brazil is a unique situation," ConocoPhillips Co. Chairman James J. Mulva said. "Brazil is self-sufficient in energy ... not so much because of ethanol. It's because they have a very strong, growing, thriving oil production, both onshore and offshore."

The Agriculture Department is expected to issue a long-awaited study around July 1 on the viability of converting sugar into ethanol.

Keith Collins, the USDA's chief economist, said the soaring demand for ethanol and Brazil's successful track record make it worth discussing sugar-based ethanol in the United States.

"At some point in the future it may be worthy of commercial development," he said. "Technologically, it's possible. The question is: Is it economically feasible?"

Collins noted that besides cheaper sugar, Brazil has higher yields per acre because of climate and investment in more-productive strains of sugar cane.

"So, obviously, we can look at the technology of conversion, and learn some things from them about that," Collins said. "But it's a little hard for us just to look at Brazil and conclude that their structure of production would be our structure of production. We can't conclude that."

Sugar in the U.S. is made from two sources: beets in some northern and western states, and cane in a few southern states and Hawaii.

Nebraska farmers plant about 50,000 acres of sugar beets a year _ a figure dwarfed by the 8.2 million Nebraska acres in the USDA 2006 forecast for corn planting.

Minnesota is the largest producer of sugar produced from beets, while Florida leads in sugar from cane, according to the American Sugar Alliance, a trade group.

"One of the things that people ... need to think about it is what generation of ethanol do they want to pursue? The corn-based or the sugar-based ethanol, which is called first-generation ethanol, is going right at the food costs," said John Hofmeister, president of Shell Oil Co.

"In other words, there's only so much corn, and if oil companies are attacked for the price of gasoline and we've seen ethanol go from $1.20 a gallon in 2005 to last week it was hitting $5 a gallon on the spot market _ if we start sucking up, as oil companies, all the ethanol, it's going to hit the price of eggs, the price of bacon, the price of hamburger, the price of Doritos and Fritos, because there's only so much corn to go around," he said.

Hofmeister, who appeared Sunday with Mulva on NBC's "Meet the Press," spoke of pursuing second-generation ethanol that uses materials such as wood chips and other carbon fibers.

There is skepticism among some sugar growers that ethanol is a viable end product for their crop.

"If I was going to guess, I would say the economics are not going to be there," said Steve Williams, president of the American Sugar Beet Growers Association, who farms about 700 acres of sugar beets in Fisher, Minn. "The food value is better for sugar than for ethanol."

But backers see room for growth in the ethanol area, especially if oil prices remain high.

"It would be absurd in 10 years if we're doing 60 billion gallons of ethanol, and the only crop in America that's not participating is sugar," said Sen. Norm Coleman, a Minnesota Republican and one of Congress' leading champions of sugar-based ethanol. Coleman is backing legislation that would encourage the use of renewable fuels.

Jack Roney, an economist with the American Sugar Alliance, agreed that the government would need to step in to stimulate a sugar-to-ethanol industry.

"It would take a combination of consumption mandates to ensure that the demand would be there, and conceivably some production incentives to use sugar ethanol," he said.

"The way that the Brazilians established their program is through 30 years of government intervention in energy and agriculture markets, to ensure there would be adequate demand and supplies."

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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