The Case Against Ethanol

by: Thomas Smicklas

This view likely reinforces the opinion of many investors. Ethanol and many other grain-based biofuels are an unmitigated folly as both a means of fuel and as an investment.

A fresh comprehensive study of ethanol and other grain biofuels done by an apparent supporter of the global warming supposition, Tim Searchinger of Princeton University, has appeared to shock the global warming community by accusing most biofuels, in certain terms, of actually being worse for the environment than standard fuels.

The ripple effects of the grain biofuels industry are mammoth. Searchinger comments, "The simplest explanation is that when we divert our (grains) to fuel, if people around the world are going to continue to eat the same amount that they're already eating, you have to replace that food somewhere else." The answer to this statement is that grain biofuel production is driving agriculture to expand in other parts of the world. "That's done in a significant part by burning down forests, plowing up grasslands and thus releasing a great deal of carbon dioxide. Right now, there's little doubt that making global warming worse."

Alex Farrell at the University of California, Berkeley, agrees. "I think this paper will have major implications for the use of biofuels around the world. If you care about greenhouse gasses then .... the biofuel industry is going in the wrong direction."

This is not just an academic matter. Federal law states that future biofuel sources will eventually need to be certified as benefiting the climate. If this latest study holds up to scrutiny, the biofuel industry that is plant-based would flunk that test.

This new study concludes that even vast efficiency improvements in ethanol production won't change the equation. As long as the starting material is grown on farmland, Searchinger says, biofuels will be bad for the planet. And, say I, bad for investors.

One solution would be to replace all farmland-based biofuel with other wastes. Animal byproducts, garbage, etc. appear to by a possible solution. Nova Biofuels (NBF) comes to mind as a play on this theme. As a practical matter, we cannot produce enough roadkill and trash to replace standard fuels. To paraphrase, would you want an animal or garbage rendering biofuel factory near your home?

Not only is an increasingly informed scientific community voting (reluctantly) against alternative grain biofuels in their present form. Companies such as Pacific Ethanol (NASDAQ:PEIX), based in Sacramento, California, illustrate the coming fiasco of plant-based biofuel efforts. Profit margins are vanishing, new ethanol plants are being second-guessed or canceled and many existing facilities are struggling.

Investment analyst Eitan Bernstein who follows Pacific Ethanol and other producers, said demand may be increasing but not quickly enough to justify new facilities. Larger producers such as Cargill and Archer Daniels Midland (NYSE:ADM) "all say they have their antennae up," states Neil Hart, economics professor emeritus at Iowa State University.

The spike in corn prices which has made the price of ethanol even less competitive with fossil fuels and has been a disaster which has only been partially relieved by increasing government subsidies. Our Congress, of course, cannot subsidize the biofuel crops such as corn elsewhere in the world whose price spikes have caused riots and near starvation to the poor in Latin America.

"We now have $6.00 corn and $2.00 ethanol", says Rick Eastman who built one of the first big ethanol plants and is now a consultant for Pacific Ethanol.

I'll bet Bill Gates never thought of the unintended harm from the cool $84m he dropped into Pacific Ethanol during construction of their first ethanol plant in Madera, CA in 2006. Another liberal feel-good program gone haywire? Big surprise.

The only way for grain biofuels to make money is through government subsidies by the wealthy, liberal-leaning nations around the globe. And the higher cost of grain because of its use as a subsidized fuel will push those least able to afford the progressive global warming agenda powering the biofuel engine further into the economic hell which will justifiably spawn more starvation and anti-American angst.

Let's face facts. Ethanol is 20% less efficient than gasoline. It takes 450 pounds of corn, for instance, to produce the ethanol to fill a seventeen gallon fuel tank.

That's enough corn to feed one person for a year or more. And it takes more than one gallon of fossil fuel - coal, oil and natural gas- to produce one gallon of ethanol. Corn and other biofuel grains must be grown, fertilized, harvested and piped (problematic) or trucked (still considered a risky ride for truckers) to ethanol producers - all of which are fuel intensive activities.

Ethanol would not survive in the free market. That is why Congress enacted ethanol subsidies of between $1.05-$1.38/gallon. One more tax on the U.S. consumer. Incredibly, we charge a 54 cent tariff against Brazilian ethanol made from sugar cane - a much more efficient bio-feed for fuel. Perhaps burning away chunks of the Amazon rain forest to plant the sugar cane for ethanol may have played a hand in this.

Grain-based ethanol mania has driven up the price of livestock, poultry and dairy products. Your breakfast cereal, too.

The grain-based ethanol hoax is a sterling example of a program economists refer to as narrow, well-defined benefits versus widely dispersed costs. It pays the ethanol lobby to organize and collect money to grease the palms of politicians willing to do their bidding because there's a large benefit for them - higher wages and profits. The millions of fuel consumers, who fund the benefits through higher fuel costs and food prices, as well as taxes, are relatively uniformed and have little clout. - Dr. Walter Williams, distinguished professor of economics at George Mason University.

Eventually, the grain-based ethanol charade will have to come to a conclusion. My bet is that non-grain biofuels will benefit. But so will coal, oil and natural gas companies presently on the global warming hit list. As P.T. Barnum said,"You can't fool all the people all the time."

Thanks to sources such as NPR, and for providing material for researching this post.

The author does not own any of the securities mentioned in this article.