MINNEAPOLIS — In the 2 1/2 years since Gordon Ommen co-founded US BioEnergy Corp., the company has quietly grown into one of the country's top ethanol producers, with plans to double in size this year and grow its capacity to 1 billion gallons a year by 2009.

But Ommen knows there are challenges ahead for both his young company and the rapidly growing ethanol industry. Thanks to that fast expansion and some distribution issues, some Wall Street and university analysts predict the ethanol boom is about to stumble on a supply glut and shrinking profit margins.

"It's going to be a little bit of a bumpy ride, I think, but in the long run we are bullish on renewable fuels and believe that they are going to be a part of our domestic fuel stream for a long time to come," said Ommen, chairman, president and CEO of Inver Grove Heights, Minn.-based US BioEnergy.

It's a view shared by Geoff Cooper, who runs ethanol programs for the National Corn Growers Association.

He said the industry expects what he called a temporary oversupply for several months, though he hesitated to call it a glut.

Lehman Brothers analysts estimated the surplus at about 1 million gallons per day starting in the second half of 2007. The firm's report attributed part of that to the ethanol plant construction boom, but said transportation bottlenecks are a bigger problem.

Ethanol is produced mainly in the Midwest and has to be moved to coastal markets by train or truck since pipelines don't exist, said Michael Waldron, a co-author of the report.

"The supply is coming online and there isn't really an efficient way to get it to the demand centers on the East and West Coasts," he said.

In addition, researchers at Iowa State University have raised concerns about profit margins being battered by corn prices that, driven by ethanol, have risen from under $3 per bushel last summer to close to $4 per bushel lately. They say that will make it difficult for ethanol plants to make money. And as the ethanol supply grows, they predict, ethanol prices will drop relative to gasoline unless there's a change in government policy to encourage more demand for it.

Last year the United States produced nearly 5 billion gallons of ethanol and will reach around 7 billion this year, according to the Renewable Fuels Association, the ethanol industry's main trade group.

The federal renewable fuels standard sets a goal for Americans to burn 4.7 billion gallons of renewable fuels such as ethanol this year, rising to 7.5 billion gallons by 2012.

Some states also offer various tax incentives to encourage ethanol use. Some states also have mandates. Minnesota, for example, requires that all gasoline sold in the state be 10 percent ethanol. Hawai'i requires at least 85 percent of gasoline sold in the state to contain 10 percent ethanol.

Bruce Babcock, director of the Center for Agriculture and Rural Development at Iowa State, said once production reaches the 9 billion to 10 billion gallon range, the price will have to come down to induce blenders to use more of it than the rules now require, he said.

Ethanol now makes up about 4.5 percent of the nation's gasoline mix, depending on location. Once that rises to 10 percent — the percentage all cars now sold in the U.S. can use without modifications — Babcock questions where any additional demand would come from. Given that ethanol has about two-thirds the energy content of gasoline, he said, ethanol would have to be priced at two-thirds the price of gasoline to induce a major turn toward E85, an 85 percent ethanol blend that can power flex-fuel vehicles.

"Otherwise no one will fill up with E85," he said.