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By Myra P. Saefong A DOW JONES COLUMN U.S. outcry for decreasing dependence on oil has climbed along with the estimates on the size of the giant spill in the Gulf of Mexico, but some of the fuel alternatives that give the nation its best shot at oil independence are threatened with extinction. The oil-spill disaster, still gushing at a rate of up to 60,000 barrels a day according to some estimates, along with a six-month moratorium that began in late May on new deepwater drilling in the U.S., has brightened the spotlight on the nation's reliance on oil. This comes at a time when production for biodiesel, a biofuel mostly made from vegetable oils, has suffered a dramatic drop--and a similar fate for ethanol may not be far behind. After all, the government failed to renew the tax credits on biodiesel when they expired at the end of last year, and tax credits on ethanol are poised to end at the conclusion of this year. Congress and the Obama administration "need to extend the ethanol tax credit and reinstate the biodiesel tax credit," said Ned Schmidt, editor of the Agri-Food Value View Report. "Failure of the Obama regime and Congress to do so makes all their criticism of BP nothing more than political noise." He called biofuels are "the best alternative to offshore drilling." Options Threat If biofuels are among the best alternatives, then it comes as a bit of surprise that the government allowed the biodiesel incentive to expire last year. Since the tax credit expired, "the industry has suffered dearly," with biodiesel production in the U.S. down to near 10% of total capacity, said Brian Milne, refined fuels editor at Telvent DTN. As of March 2009, the U.S. had 110 active biodiesel producers with total production capacity of 1.9 billion gallons per year, but capacity utilization fell to 15% in March 2009 from 23% in January 2009, according to data from the Energy Information Administration. Actual production for all of 2008 was 678 million gallons, but production in the first three months of 2009 was 93 million gallons--which would equate to about 372 million gallons per year, data showed. The lower output may make it harder for the industry to meet government mandates. The Energy Independence and Security Act of 2007, known as EISA, requires an increasing amount of renewable fuels to be used in place of petroleum-based products--36 billion gallons per year by 2022, said Milne. "There is a carve-out in the demand mandate for biodiesel this year that will still need to be met," he said. Congress is currently considering a renewal of the biodiesel tax credit of $1 per gallon. But "there's been a considerable amount of damage to the industry already," Milne said. And there is language in the EISA that could lower the demand mandate should the Environmental Protection Agency find a burden in meeting this requirement, he said. Ethanol's Dilemma The ethanol market faces its own challenges. "The biofuels groups here in the U.S. have used the oil spill as a talking point for a renewed push for their production of ethanol and biodiesel," said Beth Evans, senior managing editor, Platts Oilgram News. "They are particularly vocal since there is a decision expected soon by the Environmental Protection Agency on whether to hike the amount of ethanol used in conventional vehicles," she said. The so-called ethanol "blend wall" has held back use of the biofuel, Milne said. The U.S. allows a maximum 10% ethanol blend-in ratio in gasoline for non-flex fuel vehicles, and "we are nearly at the 10% maximum ethanol ratio." The EPA is reviewing a petition from the industry to increase the maximum ethanol blend-in ratio to 15%, with a decision expected this summer, Milne said. But there are hurdles the industry would need to overcome before the 15% ethanol blend, also known as E15 could even be sold. The EPA hasn't approved E15 for vehicles, and auto warranties only cover a 10% ethanol blend, said John Eichberger, a vice president of government relations for the National Association of Convenience Stores, or NACS. Even if the EPA approves E15, retailers may not be able to sell it because their equipment is not certified to sell anything above 10%, he said. However, NACS, which represents 80% of the nation's retail fuel sales, has developed a legislative proposal to address retailer concerns on fuels with greater than 10% ethanol. Tax-Credit Push In the meantime, "ethanol lobby groups have been fighting hard to extend the tax credits for ethanol, especially after watching what's taking place in the biodiesel industry," Milne said. Tax incentives for ethanol, along with the Renewable Fuels Standard program that establishes a renewable fuel volume mandate, would provide "the necessary public policy framework to ensure America's domestic renewable fuels industry is allowed to be successful," the Renewable Fuels Association, or RFA, said. But "if the ethanol tax credit expires, the U.S. ethanol industry will face dire straits," Schmidt said. The price of ethanol would fall, weak players would be forced out, and those companies with cost structures, mainly smaller operations, will not survive, he said. And, "ultimately, retail gasoline prices will rise to offset the loss of the tax credit," he said. About 10.6 billion gallons of ethanol in 2009 displaced the need for 364 million barrels of oil from places like Venezuela and the Middle East, according to the RFA. U.S. production of ethanol has been climbing since the mid-1990s--to more than 9 billion gallons in 2008, figures from the U.S. Energy Information Administration showed. That could drastically change if the tax credits aren't renewed. "It will become increasingly difficult to sell ethanol and biofuels in a price-competitive manner," said Eichberger. "These credits are critical to provide them with an economic parity or advantage compared to gasoline." (Myra P. Saefong is a writer for MarketWatch. She can be reached at 415-439-6400 or via email at AskNewswires@dowjones.com.) (END) Dow Jones Newswires June 18, 2010 08:41 ET (12:41 GMT)