Ethanol Update: Challenges and Opportunities

Ethanol has been beaten down in the press lately as firms that rushed into the market are faced with high raw material prices and low market acceptance. Early on in the boom, farmers who invested in ethanol plants reaped enough profits to pay off their investments in just a few years. As investors saw the profit potential they rushed in, hoping for massive gains and created an inflationary spiral in the corn market. Corn prices more than doubled, causing riots in Mexico (where corn is a basic foodstuff) and creating a situation where farmers stopped producing other crops and switched to corn. In the last year, cotton has lost 30% of its acreage as farmers switched from cotton to corn.

The biggest challenge facing corn based ethanol plants going forward will be the potential for water shortages as water use in making corn based ethanol is significant. While the total water usage may not rise by a large amount, the long-term effects could be severe.

In the Gulf of Mexico there is a 7,900 square mile area known as the dead zone. The area is so depleted of oxygen that fish cannot survive. There are worries about a possible rapid increase in the dead zone due to nitrogen runoff in the water supply from the planting of corn in the Mississippi River basin. Environmentalists fear that a continued increase of nitrogen runoff will set off a chain reaction in the Gulf of Mexico and Mississippi River basin.

30 years ago the Brazilian government put its weight behind ethanol as an alternative fuel. Now as we see oil prices continuing to show strength at the $90 level, Brazil has declared independence from imported oil. This will provide a significant boost going forward for the world's 10th largest economy as none of the economies above Brazil can make that claim.

As long as the US and Europe continue to block attempts by Brazil to slash ethanol tariffs in the WTO, Brazil will continue to gain a competitive advantage with the world. Lowering tariffs would create a more competitive environment globally where low cost ethanol producers will be forced to either become cost competitive or exit the sector.

At the present time, sugar based ethanol is the price leader at the present time with prices approaching $1.25 per gallon. The markets are beginning ot catch on to sugars price advantage and have bid the price up over 10 cents.

In the next few years, if cellulosic ethanol can become viable at levels approaching sugar based ethanol than the US will be able to make a transition from oil to ethanol based fuels. The problem with including cellulosic ethanol in any discussion is that the final costs in producing a gallon are not yet known.

If cellulosic ethanol (especially those made from forms of invasive weeds like Johnsongrass) can come with costs of $1.25 a gallon, challenging sugar based ethanol, versus corn based ethanol at $3 then marginal producers will exit the sector causing a fall in corn prices tumbling down the ladder to tortilla, feedstock, and eventually meat prices. Prices will rise for cellulosic ethanol as farmers switch crops, causing pain for investors who were late to the boom, and eventually the system will move to a point of balance.

One of the risks of cellulosic ethanol is that some of the plants used to create ethanol can be known as aggressive weeds which may cause long-term damage to surrounding farms and areas.

With the 2007 energy bill is now complete the push towards alternative fuel sources will begin in earnest. The rise in national fuel economy standards is a start as is the mandatory use of biofuel but the long lead time before meeting the standard does not impose a sense of urgency which is needed.

Even with an increase in the mandate, the automobile industry has to be ready to meet the increasing and changing demand. This transition period can take years as evidenced by Brazil but will pay dividends in the long run

Comments

[marymac:]

What about the companies using woodchips and municipal waste instead of food sources. Check out the nbr(nova biosource fuels) they have begun to use various methods to produce ethanol. by 2nd qtr of 2008 they will be fully functional and mass producing barrells of the product. BFRE(bluefire ethanol fuels) is in the plant building phase, but have caught on that non food source produced ethanol is economical and yields far greater product than corn or fat source ethanol. Lastly is GFET(Guf Ethanol) prior to energy bill being signed they were in full swing to begin with the corn based ethanol method, but now has to regroup and follow the lead of the 6 companies that the govt. has invested milions into to produce non food source ethanol.

2007 Dec 27 04:57 PM

[mog:]

Several things to note:

It has been established that corn ethanol contributed less to high prices than other factors, including high shipping costs due to petroleum prices. It happened to be convenient for the multinational food and petroleum industries that there was a surge in ethanol production at the time. Any number of graphs and charts using real figures on the small percentages of corn actually used for ethanol will show a different story than the one we have all heard repeatedly on the "News."

Prior to NAFTA, and the flooding of Mexico with cheap corn, there was more domestic corn production and less reliance on US corn.

The dead zone in the Gulf is due to algal blooms. What is the newest craze in fuel production, particularly for those hoping for a renewable to be the mascot for "Green Gasoline"? Algae.

If Baucus's tax changes in the "Health Care" bill strip out all the tax incentives and breaks for petroleum companies, tie some tax perks to using Gulf algae for their "Renewable Petroleum" projects.
I don't like Baucus and others putting petroleum subsidy elimination into a "Health Care" bill, but the end of those tax breaks, special rules, and perks is long overdue. Without those funds, the question changes 180 degrees, to "Will gasoline be competitive with alternative fuels?"

I have watched this issue since the late 1970's, and talked with people who remembered the same issues from the WW2 era and before. In the 70s and 80s, a lot of time was spent advertising all the things that were being done to extract oil from this or that unlikely source. A few of those have worked, many more have made less progress than cellulosic ethanol has in the same amount of time. Given the disparities between the R&D tax breaks on petroleum, and the much-talked-about pittance granted to alternative energy sources, one wonders if the petroleum industry is serious about anything but stock prices.

The problem has always been one of pointing fingers. The pot is forever calling the kettle black, from within the alternative fuels world and without, the result being that nothing gets done and the status quo is left to roll on, belching smoke all the way. While countless gallons of crude spill in Australia, on the Alaskan Tundra, into the oceans around off-shore rigs, the net abounds with people talking about ethanol being dirty.

While electric cars are the new fad, and politicians who can't tell Lignite from Anthracite from Uranium talk about "Clean Coal", our electrical power generation produces more pollution than all the gasoline powered cars on the road.

Marketwise, will ethanol ever take the lead? Publicity wise?
Not until an ethanol engine is built that gets fuel mileage akin to a hybrid or diesel. The answer is not political or economic.
Just like the crisis in the US right now, the answer is to put people to work. Forget the politics and economics. Build the engines. Stop playing with engines built for gasoline or diesel, build ethanol engines, market the cars in areas with a lot of ethanol support, and you build demand. Build demand, and you need a supply. Corn will become too expensive to meet demand, just as oil demand outstripped domestic production fifty years ago.

Sep 25 10:39 AM