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NEW YORK - The economic viability of ethanol as an alternative to petrol has been thrown into question as the oil price fell below US$50 a barrel yesterday for the first time in nearly two years, while the price of corn - the main ingredient in the new fuel - surged to a new 10-year high.
On the commodities markets yesterday, corn prices rose for the sixth straight day, making it much less profitable to produce ethanol.
At the same time, with oil stockpiles building up in the US, the price of crude fell to a 20 month low of US$49.90 in New York, before ending at US$50.50.
Ethanol is mixed with petrol for use in so-called "flex fuel" vehicles which emit fewer greenhouse gases, and there is a growing push to switch more drivers to use fuel with a higher ethanol content.
President George Bush has championed ethanol last year when petrol prices were at their peak, arguing increased production of the alternative fuel was a way to break America's "addiction to oil".
As a result, the US department of agriculture estimates that the consumption of corn to produce ethanol will be up 46 per cent this year - a prediction that, when it was made public last week, prompted a sudden spike in the corn price.
After a decade of trading between US$2 and US$3 per bushel, corn was trading yesterday at US$4.09 a bushel.
As well as making the main source of US ethanol more expensive, the higher cost also threatens to raise the price of a swath of food products.
David Driscoll, analyst at Citigroup, said ethanol producers were much riskier investments after the recent spike, although he expects US farmers will respond by planting more corn in 2007.
"Although the recent rally in corn prices does not feel good on the surface, we believe that it should serve as a catalyst in driving significant corn acreage expansion and ultimately reduced corn prices," he told clients.
"Despite the volatility in crude oil and corn markets, ethanol continues to remain a very profitable business with crude oil prices above US$50 a barrel."However, the relative financial attraction of ethanol was being eroded sharply yesterday, as oil fell to US$50.05 at one point during morning trading.
The price of crude sank more than 3 per cent after a US government report showed that inventories had their biggest gain since October 2004.
Traders blamed the unusually warm weather across most of the energy-guzzling North-east of the country.
The oil price is down by more than a third from its record high of US$78.40 a barrel on 14 July last year.
- INDEPENDENT
