by Joe Carroll and Mario Parker

20-11-07

Ethanol, the centrepiece of President George W. Bush's plan to wean the United States from oil, is 2007's worst energy investment.
The corn-based fuel tumbled 57 % from last year's record of $ 4.33 a gallon and drove crop prices to a 10-year high. Output in the US tripled after Morgan Stanley, hedge fund firm D.E. Shaw & Co and venture capitalist Vinod Khosla helped finance a building boom.

Even worse for investors and the Bush administration, energy experts contend ethanol isn't reducing oil demand. Scientists at Cornell University say making the fuel uses more energy than it creates, while the National Research Council warns ethanol production threatens scarce water supplies.
As oil nears $ 100 a barrel, ethanol markets are so depressed that distilleries are shutting from Iowa to Germany. An investor who put $ 10 mm into ethanol on December 31 now has $ 7.5 mm, a loss of 25 %. Florida and Georgia have banned sales during the summer, when the fuel may evaporate and create smog.

"I don't anticipate any sort of immediate rebound," says Barry Frazier, the 50-year-old president of Centre Ethanol in suburban St Louis. "It's going to take 12 to 24 months before the market is able to absorb the large amount of new capacity."
The biggest producer, Archer Daniels Midland, may resort to exporting ethanol. Pacific Ethanol, backed by Microsoft Corp co-founder Bill Gates, dropped 63 % in New York trading this year as profits collapsed. Record oil prices, which make blending of ethanol with gasoline more profitable for refiners, haven't stemmed the declines.

“Ethanol companies are near break-even at best," says Ron Oster, a principal at Broadpoint Capital in Albany, New York. "That's not a good recipe when you have $ 100 oil."
Corn has risen to $ 3.795 a bushel on the Chicago Board of Trade from less than $ 2.50 in September 2006. Ethanol on the exchange is little changed at $ 1.865 a gallon, after calling from a peak of $ 4.33 in June 2006.

The Bush energy plan triggered output by mandating increased use of so-called biofuels, such as corn-based ethanol. The administration proposed raising output in the next 10 years to five times the current target amount for 2012.
The US Senate approved the increase and lengthened the time frame to 2022. The federal government has 20 separate laws and incentives to boost ethanol use, and 49 states offer additional subsidies and supports, according to the Energy Department in Washington.

Source: www.shanghaidaily.com