Drunk on Ethanol

January 21, 2007 at 8:18 pm
Contributed by: Chris


Here’s a recent article I wrote for Wealth Daily about the explosive growth I expect this year in ethanol production, and why it’s a good sector to invest in.

Drunk on Ethanol


By Chris Nelder

Alcohol—It’s not just for drinking anymore.

Those who watched the ethanol charts in 2006 might have thought they were looking at a drawing of the Eiffel Tower, so sharp and fast was its rise and fall. So before we get into the real story about why ethanol is probably going to be 2007’s hottest sector, let’s look at what went wrong.

I believe the biggest reason was simply speculation. A big tide of “hot money” flowed in and then flowed out of the ethanol group. President Bush admitted to our nation’s addiction to oil, oil prices shot up, and a mandatory phase-out of MTBE started to take effect, all bullish indicators that came within a few months of each other during the spring. Momentum begot momentum, and the whole group rose precipitously.

But then oil prices softened and confidence in the economy came roaring back as the hurricane threat failed to materialize, geopolitical threats seemed to stabilize (albeit temporarily), inventories rose and damaged infrastructure was rebuilt. So oil fell sharply through the second half of the year and took the ethanol group with it.

Was any of this a reason to stop loving ethanol? Not on your life. It was just a big party where a bunch of traders got drunk on ethanol and then woke up with a hangover. All of the above were short-term factors. On the fundamentals, ethanol is swelling like a grape. Let’s look at the facts.

The Only Major Substitute

As any observer who is up to date on the problem of peak oil knows, the most pressing problem right now isn’t a need for greener electricity, but for liquid fuels. Solar and wind and most other forms of RE make electricity. What we need most urgently is a replacement for liquid fuels, particularly diesel and gasoline.

Biodiesel is a good alternative, and if properly managed it can even be carbon-neutral. But numerous studies have shown that there are few places in the world where biodiesel production can be significantly scaled up without cutting into food supply, and even in those places the potential is minimal—a few percent of the overall need. And this is simply because growing oilseed crops is an energy-intensive business that requires good farmland—just like food crops. This is true for soybeans, corn, rapeseed and all the other typical feedstocks for biodiesel.

That leaves only a couple of liquid fuel alternatives: ethanol, methanol, and various forms of gas-to-liquid technology, which I discussed in last week’s article. Of the alternatives, ethanol is the only real contender that is ready to step up right now and deliver an alternative liquid fuel at production-scale levels that doesn’t depend on oilseed crops. Because it’s the product of fermentation, and not of an oilseed, it can be made from all sorts of waste products—landfill contents, biowaste from agricultural operations, wood chips, basically anything organic—and it can be used as a small (5–10%) portion of the fuel mixture for any gasoline engine without modification, or as a large (85%, or “E-85”) portion in “flex fuel” vehicles. Ethanol is already replacing MTBE to fulfill a federal mandate that took effect last year.

The landscape for 2007 is so bullish for ethanol, at least one analyst has worried aloud that we might have an ethanol oversupply by the end of the year. But I don’t believe that will be the case, as most analysts like him know far less than they should about the realities of global oil supply.

Fifteen-Fold Growth Ahead

The Energy Information Administration’s (EIA) new Annual Energy Outlook 2007 report projects major growth for ethanol, from about 5 billion gallons today to 13.6 billion gallons in 2030. But that’s just for corn. From cellulose, according to DoE, it could be another 47 billion gallons. That’s a 15-fold increase in ethanol production over the next 25 years. Yowsa!

For its part, biodiesel is set for a 16-fold increase, from 25 million gallons in 2005 (a small fraction of one percent of our transportation diesel) to 400 million gallons in 2030.

Quick Reality Check

Now, that’s a growth story any investor can get excited about. But before we get carried away with it and start thinking that this is going to bail us out of the peak oil problem, let’s have a little reality check.

To be clear, I do believe that we will increase our use of biodiesel as enthusiastically as we are doing with ethanol—wherever we can and to whatever extent we can. Every producer will sell every drop it refines, and get a decent price for it, and their shareholders will be happy campers. Biodiesel has as much enthusiasm as ethanol in Congress and in the business world and retail market.

But our best-case projection of 61 billion gallons of ethanol capacity by 2030, is less than half our current U.S. gasoline consumption of about 150 billion gallons annually. Actually, it’s closer to a third when you consider that ethanol has only about 70% of the energy content of gasoline.

Our current production of ethanol, at 5 billion gallons, is only about 3% of our current gasoline consumption. And by the way, it required a full 13% of the U.S corn crop to produce, as 98% of it was made from corn.

Now you see why I call corn our least-desirable feedstock for biofuels. I know—as apparently, not many policymakers do—that the EROI, or energy returned on investment—is so low for most oilseed based crops that in the long run they’re simply not worth using. And this is nowhere as true as it is for corn, the most favored by far of all biodiesel feedstocks. The moral of the story? Just because it doesn’t make sense in the long run doesn’t mean we won’t do it. Same old, same old. Viva Monsanto!

Still, the growth anticipated in the biofuel sector is nothing short of huge.

It’s a Corn-Likker Hoedown

Let’s run down just a sampling of the recent announcements about ethanol projects:

  • Last week, Alternative Energy Sources (AENS.OB) announced that they have received $1 million in government grants for new ethanol plants in Illinois and Iowa.
  • On December 28, 02Diesel Corp (OTD), which makes clean-burning ethanol/diesel fuel blends, announced that it has received another $1 million in funding from the Department of Defense, with which it is under contract to help figure out how to switch to cleaner-burning diesel fuels for the military’s massive rolling stock. (Most war machines run on diesel.) The DoD is the largest energy consumer in the Federal government and one of the largest consumers of liquid fuels overall, burning through 60 billion gallons a year. Under Executive Order 13123 of 1999, the DoD must reach a 35 percent reduction in energy use by 2010, and it’s going to achieve a good chunk of that by using more ethanol.
  • On December 22, Canada’s government announced new targets for renewable fuel content (that’s ethanol and biodiesel) in gasoline and diesel, requiring an average of 5% renewable content in gasoline by 2010 and 2% in diesel by 2012. That might not sound like much, but it constitutes a massive upscaling of ethanol production.
  • Cargill Inc. subsidiary Emerald Renewable Energy LLC has just announced that it will build four new 100-million gallon ethanol plants in the Midwest, nearly tripling Cargill’s ethanol production.
  • Demonstrating their serious intent in Congress, Sen. Barack Obama and other Midwest senators have already offered the Biofuels Security Act, which would require the United States to use 60 billion gallons of ethanol and biodiesel a year by 2030. Along with Sen. Jim Bunning (R-KY), he also introduced the Coal-to-Liquid Fuel Promotion Act of 2007, a package of loan guarantees and tax credits that would promote large-scale production of CTL fuels. Other Congressmen are offering their own energy solutions, such as Rep. Roscoe Bartlett’s Energy Farm Bill, which will offer federal R&D support to make farms “net positive” in both food and energy.

But that’s just a small sample of what’s in the works. This is an absolutely massive growth opportunity. The bottom line is clear: ethanol is finally going to have its day, big time, and starting this year.

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