I am an advocate of alternative energy and I have no bias against ethanol
or in favor of oil. In fact, politically I am pro-ethanol, both for
environmental protection and for energy independence. However, there are
economic data to consider when making financial investments.
American corn ethanol is being promoted by many of the investment banks
that brought on the dotcom boom and bust of 2000, and there might well be
a similar bubble growing in ethanol investment that may pop with
devastating consequences for American ethanol. While writing a research
report on the corn ethanol industry for altenews.com, I came upon an
extensive assortment of statistics that will put a damper on corn ethanol
in the next five to ten years. After a consideration of market data, there
are some interesting and disturbing factors for investors to consider
before investing in ethanol in America. There are also some aspects of
corn ethanol that will bother environmentalists. I will offer analysis of
some of these factors below.
There are simple dynamics of supply and demand that will cause the price
of corn ethanol to drop within the next ten years. Ethanol demand has been
created by federal and state government mandates requiring ethanol use,
including the switch from MTBE and the Energy Policy Act. However, fueled
by the ethanol investment boom, so many new plants are being built that
ethanol capacity will outgrow mandated usage in the near future. When that
happens, supply will be greater than demand and the price of ethanol will
drop.
The profit margin for ethanol producers is dependent upon enormous
government tax incentives and tariffs. If government support for ethanol,
which is currently propped up by farm state Senators and industry
lobbying, were to fade away, then profit margins would suffer fatal blows.
Much of the political interest in ethanol is as a way to counter high gas
prices which anger voters, and if crude oil and gasoline prices drop, it
may sap political support for ethanol. Ethanol gets less mileage per
gallon than gasoline, and wholesale ethanol costs more than wholesale
gasoline, so if oil prices drop and bring down gas prices it will produce
brutal competition from gasoline. Ethanol has not yet achieved mainstream
status among drivers, so it must be able to compete with gasoline. Thus,
the success of ethanol depends upon the price of oil. There is also a lot
of data concerning tight corn supply that may bring the price of ethanol
up and lead to competition between corn for fuel and corn for food.
Ethanol has been championed by environmentalists and advocates of clean
energy. However, there are factors in regards to which it may not be best
for renewable energy activists to like the corn ethanol produced in
America as opposed to two other kinds of ethanol, the sugarcane ethanol
made in South America and the cellulosic ethanol that is being developed
in research laboratories. Brazilian sugarcane ethanol is cheaper to
produce and more energy efficient than American corn ethanol, and the only
thing protecting corn ethanol is the prohibitive import tariff. However,
Brazilian ethanol may reach America duty-free through a loophole in CAFTA
and the Caribbean Basin Initiative. Brazil's ethanol has led Brazil to the
position of having forty percent of its fuel needs filled by ethanol,
marking it as far advanced over America in ethanol usage, in part because
of the qualities of sugarcane ethanol. Cellulosic ethanol, which is
already being produced in Canada and whose large-scale production is in
the development stage, may be six times more energy efficient than corn
ethanol and produce no pollution, which would be significantly cleaner
than corn ethanol. The American corn ethanol lobby, funded by the ethanol
investment craze, may exert political power to suppress sugarcane ethanol
and cellulosic ethanol, in which case it may actually act against the
anti-pollution agenda of clean energy in the long run. Competition from
Brazil and cellulose will also have a harsh impact on corn ethanol
profits.
There are other arguments that can be made against the environmental
benefits of American corn ethanol. The nation's largest manufacturer of
ethanol, ADM, is reported to be burning coal to power its ethanol
production plants. Research suggests that ethanol made from coal-burning
plants has no net benefit in terms of reducing air pollution. It has also
been reported that ethanol plants have enormous water needs, demanding as
much as two million gallons per day, which may upset some water
conservationists.
Another factor to consider is the impact of celebrity endorsements of
ethanol, which are distracting investors from the hard data of the ethanol
market. Richard Branson and Ted Turner are often cited, but they are
reported to have interest in cellulosic ethanol as well as corn ethanol.
Bill Gates is perhaps the most well-known endorsement of corn ethanol with
his $84 million investment in Pacific Ethanol. What is little talked about
is the fact that Bill Gates received extremely generous terms for his
investment that the average investor will never come close to. Based on
the one-to-two conversion ratio of his preferred stock to common stock, it
can be said that Gates paid one fourth of the price that the average
investor paid for Pacific Ethanol stock on the same day of the
transaction. Also, the terms of his investment give Gates substantial
control over the company. Big name endorsements and media coverage are
causing an ethanol investment craze that is overwhelming the tendency of
investors to invest based on actual data.
The full text of my analysis of the ethanol industry and the statistics to
support my conclusions can be found in the research report called "Ethanol
Investment: Golden Opportunity or Fool's Gold?" in the research report
section of Alternative Energy News Source, www.altenews.com/researchreports.htm.
To summarize my conclusions, ethanol deserves political support for
environmental and energy independence purposes, but investors interested
solely in profits should be cautious. If the ethanol boom goes the way of
the dotcom bubble, then various factors will cause the majority of ethanol
startups to go bust in five to ten years, having been nothing more than
fool's gold, but the better ethanol companies will survive and prosper,
creating golden opportunities for investors who study things such as
supply of raw materials, manufacturing costs, and other market data.
Anyone who likes ethanol should also be on the lookout for the development
of cellulosic ethanol, which will one day revolutionize the biofuels
industry. Investors and environmentalists who are troubled by this
information are invited to read "Ethanol Investment: Golden Opportunity or
Fool's Gold?" which is available free to the public on altenews.com.
About the author...
Russell Hasan is a graduate of Vassar College. He is the founder of
Alternative Energy News Source (altenews.com). He cares passionately about
environmentalism, and his reports and editorials focus primarily on the
investment opportunities of clean energy.
The information and views expressed in this article are those of the
author and not necessarily those of RenewableEnergyAccess.com or the
companies that advertise on its Web site and other publications.
