Ken Silverstein EnergyBiz Insider Editor-in-Chief

That comes atop an investment by Microsoft founder Bill Gates and Sun Microsystems co-founder Vinod Khosla and an "endorsement" by former Fed Chairman Alan Greenspan. He said that ethanol made from cellulose products such as wood chips, municipal waste and trees has the potential to notably cut into gasoline consumption. The exuberance is tied to favorable government policies, high gas prices and improvements in technology, all of which will add about 35 new ethanol plants to the existing 100 in the next 12 to 18 months.

Right now, ethanol is made mostly from corn. The central criticism has been that it takes an awfully lot of energy to create a gallon of ethanol from corn. Some circles say that when it is all tallied up, it's a wasteful process. More recent studies refute those findings, including one by the Department of Energy. It says that for every one unit of input, 1.4 units of ethanol are produced. While not earth shattering, chances are the results will only get better over time.

"The ethanol industry, as it relates to technology, is really hitting its stride," says Reece Nanfito, senior director of marketing for the Ethanol Promotion and Information Council in Omaha, Neb. "New technologies are increasing the yield, or the gallons of gas created per bushel of corn that is used."

Corn-based ethanol is here now. As such, Nanfito explains that 40 percent of the nation's gasoline supply has some ethanol mix attached to it. All vehicles can now run on a blend of 90 percent gas and 10 percent ethanol, called E10. The ultimate goal is to get to a blend of 85 percent ethanol and 15 percent gas. But, that is a stretch, given that just 6 million cars are now equipped to run on what is called "E85" and only 700 pumps are equipped to provide the fuel.

At present, ethanol blended gasoline makes up 2 percent of all fuel sold in the United States. All told, 1.5 billion gallons of ethanol are consumed annually compared to 130 billion gallons of gasoline.

The Energy Policy Act of 2005 endorses ethanol. Lawmakers have said that the use of fuel additives is a must. Beyond that, the 2005 law did away with the oxygenate requisite called MTBE, which is an octane booster but which has been shown to pollute groundwater. Ethanol has been chosen to replace MTBE, which California, Connecticut and New York are mandating.

To meet the expected future demand, the Renewable Fuels Association says that new plants that would produce an extra 1.9 billion gallons of ethanol are going up. Already, production increased in 2005 to 3.9 billion gallons, a 15 percent increase from 2004.

The Possibilities

The added capacity should put downward pressure on ethanol prices, which now add up to more than $4 a gallon. That won't be so good for ethanol producers, which have seen their stock prices soar in light of the current ethanol buzz.

Indeed, Pacific Ethanol - the company in which Bill Gates bought a sizable chunk -- has seen its share price rise by 25 percent. Meantime, Green Plains Renewable Energy has risen by as much while Diversa Corp. and Xethanol have done the same. Archer-Daniels-Midland has outdone them all.

The ethanol picture is potentially brighter if it can be commercially produced from cellulose. Such material is abundant and could supply billions of gallons of ethanol that would replace gasoline, although it is still expensive when compared to corn-based ethanol. Venture capitalists believe ethanol made from cellulose have a positive future.

Canadian enterprise Iogen -- the one Goldman Sachs invested in -- has built a demonstration project in Ottawa. Another Canadian company, Syntec Biofuel, has a different process that it says will be ready in three years. It says its cellulose process produces 10 units of energy for every one unit that is input.

To be sure, no one is predicting that ethanol will replace gasoline. In fact, the U.S. Energy Information Administration predicts that oil consumption will increase over the next quarter century. That's because transportation needs will only rise.

Sure, America's farmers are key benefactors and so receive ethanol-related tax breaks. But a greater use of ethanol would be beneficial environmentally, economically and politically. Ethanol is domestically produced and creates less pollution, including fewer greenhouse gas emissions thought to cause global warming. In the case of ethanol made from corn, carbon reductions are thought to be around 10 percent. If it is made from wood chips, the cut would be much greater.

"Ethanol plants run much cleaner than petroleum," says Nanfito from the ethanol council. "The main output is steam," he says, adding that the byproduct can be used as high-protein animal feed. Any excess power created at the plant has the potential to be sold into the public power's supply.

Right now, ethanol is in favor: Lawmakers are endorsing it while consumers are shown to have a favorable view of it. Users are made aware of any ethanol purchases largely by announcements made at the pump that tell them the gas they are buying is blended. While that is not saving them any money, it is helping to reduce the nation's reliance on oil purchased overseas. If they impressed, it might help expedite the future of cars that can run on E85.

Some major investors are banking on heightened awareness, improved processes and increased ethanol production. If their bets are right, it might be a breath of fresh air not just for the automotive industry but also for the rest of the populace.

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