Round 2 Is Still Ahead: Ethanol Firms vs. 'Big Oil'

IN a match with United States oil companies, the up-and-coming makers of enthanol got bruised recently in court. But ethanol producers say that their comparatively clean, farm-friendly gasoline additive will eventually beat back ''Big Oil.''

The fight has broad implications for the environment and the rural economy.

Oil companies say their bout with ethanolmakers has been fixed. The ethanol industry, they argue, produces such a costly additive that the industry would go down quickly if deprived of federal tax breaks and regulatory support.

The latest sparring in the long-running feud between the oil and ethanol industries centers on an April 28 decision by a federal appeals court blocking the Environmental Protection Agency from requiring refiners to use ethanol as a gasoline additive. The EPA is considering an appeal.

Ethanol production has surged 63 percent since 1990, when the Clean Air Act required the sale of a clean, reformulated gasoline in Chicago and eight other major markets troubled by smog.

Last June, the EPA gave ethanol a further boost by ordering that 30 percent of oxygen-rich additives used in reformulated fuel come from a renewable energy source. Ethanol, derived largely from corn, is the only such additive on the market. But the federal court, acting on a suit filed by two associations representing the oil industry, ruled last month that the EPA had acted beyond its authority. Oil companies produce an additive made from natural gas.

''Contrary to what the media and farmers say, we are not opposed to ethanol. We are just against government subsidies and mandates, and we believe refiners should decide which is the best oxygenate,'' says Joseph Lastelic, spokesman for the Washington-based American Petroleum Institute, a plaintiff in the suit. For years the oil industry has opposed tax breaks for refiners using ethanol, which now equal about 5.4 cents per gallon.

''The [court] ruling might subdue growth [in ethanol use] somewhat,'' says Mark Lambert, spokesman for the Illinois Corn Growers Association in Bloomington, Ill. ''Instead of double-digit growth, we'll just have single digit -- but we'll eventually end up with the same market share.''

Indeed, ethanol production will probably continue as the fastest-growing use of corn. This year the industry will turn 620 million bushels of corn into the additive, an increase of 8.7 percent over last year, Mr. Lambert predicts.

Corn growers and ethanol producers cast the recent suit as a triumph by big multinational businesses bent on quashing a small competitor.

''That's just not true,'' says Mr. Lastelic, noting that oil refiners are major buyers of ethanol.

Still, by many measures ethanol appears to be a formidable rival to the oil industry's product. Unlike its more limited rivals, it could be produced for as long as farmers grow starch and sugar crops. It does not worsen global warming because, unlike fossil fuels, it does not add additional carbon dioxide to the atmosphere.

Moreover, the ethanol industry helps generate comparatively well-paying jobs in rural America, which has been hit especially hard by layoffs and a decline in wages since the early 1980s.

The Pekin Energy Company, which produces 100 million gallons of ethanol a year from corn, employs 225 workers and generates five times more jobs in services or related business in the surrounding area, says Ron Miller, senior vice president of the company based in Pekin, Ill. Broadly speaking, an increase in annual ethanol production to 2 billion gallons from the current level of about 1.2 billion gallons would create 28,000 jobs, according to the United States Department of Agriculture.

Ethanol factories use roughly 5 percent of the annual US corn crop. Each 100 million bushels of corn used annually in ethanol production raises corn prices on the farm by 4 cents to 6 cents per bushel, calculates the USDA.

The additive also saves taxpayers money. Instead of idling land in return for federal payments, farmers grow corn for ethanol production and forgo $1.1 billion in USDA farm payments, says Mr. Miller, quoting industry estimates. (The federal government's net gain is $550 million because it exempts refiners who use ethanol from some $550 million in federal excise taxes in order to promote the additive, says Miller.)

Ethanol, its promoters note, helps reduce the import of costly oil. By raising ethanol production to 2 billion gallons annually, the US would avoid the import of 41 million barrels of oil worth about $1 billion, according to the USDA.