Ethanol appears to be the new and exciting
source of renewable energy, drawing considerable
investor interest, as reflected by recent initial
public stock offerings such as VeraSun Energy and
Pacific Ethanol. The use of ethanol is also
politically expedient, as it is perceived to be an
alternative to Middle Eastern oil.
Ethanol
also benefits from growing concerns over the
long-term supply of oil. And in the US, ethanol's
environmentally friendly role is growing because
of legislation mandating a phasing-out of other
fuel sources with the toxic ingredient methyl
tertiary-butyl ether (MTBE) in favor of ethanol.
Yet there remain big questions about the
projected long-term
viability of ethanol as
the major oil-replacement fuel stock.
Why ethanol? The economics
behind ethanol do not necessarily demonstrate its
practicality. Simply stated, it is unclear whether
ethanol will be the solution to US energy woes.
At the same time, there is currently an
inadequate supply of ethanol to fulfill demand.
The pressure from government forced the United
States to produce 4 billion gallons (15.14 billion
liters) of ethanol in 2006, which is forecast to
increase to 7.5 billion gallons (28.39 billion
liters) in 2012. This is helping to fuel an
ethanol boom that will double the size of the
industry by 2008. A number of states have a
mandate in place to use 10% ethanol as the
blending agent, replacing MTBE, which contributes
to more environmental pollution than ethanol. As
of April at least 85% of Hawaii's gasoline must be
10% ethanol.
In the United States, ethanol
has been used in vehicle fuel for many years, but
only as a blending agent. The recent increase in
oil prices and angst over depleting oil reserves
has led everyone's attention toward ethanol
production. Over time it is likely that ethanol
will become much more important as a fuel source,
but the technologies to make that happen appear to
be decades away. It took decades for petroleum to
be the main source of energy and years to make it
burn more efficiently. For example, petroleum was
first used as medicine, then as a fuel for
lighting, then slowly moved toward its use in
transportation.
It took time for petroleum
to go mainstream. The same factors apply to
ethanol; it will take years before ethanol can
fully replace oil, because basically everything
runs on gasoline. For example, the median age of
light vehicles in the US vehicle fleet is about 14
years, and it could take about 14 years for the
fleet to be replaced by vehicles that can run on
both gasoline and ethanol.
Who's
pushing ethanol? There is an important
political dimension to the use of ethanol in the
United States. The farm lobby is strong and
promotes ethanol as the fuel of the future,
especially as it represents considerable profit
potential. According to the Organization for
Economic Cooperation and Development (OECD), it
would require almost a one-third of US farmland to
power one in 10 of America's cars with home-grown
ethanol based on corn (maize).
Consequently, the government is investing
in a technology that is not up to the challenge
because of land-use issues, a weakness in
transportation and refining infrastructure, and a
very political regime pertaining to keeping
potential external sources of ethanol fuel-stock
out of the market. According to an editorial in
the Jamestown, New York, Post-Journal: "It should
come as no surprise that ethanol's best friends
are in farm states - including members of Congress
who represent them. Regardless of whether expanded
use of ethanol would be good for US motorists, it
would help those states."
The study
conducted by Alexander Farrell of the University
of California, Berkeley, published in Science
magazine indicated that corn-based ethanol cuts
overall greenhouse-gas emissions by only 13%
compared with gasoline. In Brussels, the European
Commission has found that the standard production
methods for sugar-beet ethanol in Europe reduced
global-warming emissions by one-third.
Consequently, the question must be raised as to
why Americans are investing so many resources in
corn-based ethanol that reduces emissions by only
13%, when it can invest the same resources toward
producing sugar-beet-based ethanol that reduces
the emissions by 20% more. The answer, of course,
is that it is all about keeping the farmers happy
and showing the American public that the country
is striving toward independence from foreign oil
imports.
Who benefits? Analysts
are predicting that by 2008, ethanol production
will reach 8 billion gallons (30.28 billion
liters) in the US, but there remains a worry that
the demand for corn could strain food supplies,
raise costs in the livestock industry, and
ultimately lead to a land rush. Already
Agriculture Department economists expect the value
of this year's corn crop to climb roughly 20% over
last year, also elevating the prices of sugar to
record levels. The agriculture industry will
benefit the most. This includes such companies as
Archer Daniels Midland, Cargill Inc, Monsanto and
DuPont that are involved in the production of
ethanol or corn seed, or genetically engineering
them to provide the most acreage.
There is
no disagreement that the ethanol frenzy will lead
to a clean, green alternative to oil and relieve
the US from the dependence on the Organization of
Petroleum Exporting Countries for oil, but many
believe it makes more economic sense to import
this fuel from Brazil or any other country that
produces ethanol more cheaply or is much better
placed in the production method of ethanol. The US
therefore would benefit from being less stringent
about its policy on ethanol imports, otherwise it
will waste its scarce resources on the production
of a fuel that is not made efficiently at an
optimal cost. This would require the US to work
side by side and to welcome the transfer of
technology from countries that have a competitive
advantage in ethanol production. Scrutiny by
Congress is needed to research more about the
expanded use ethanol before a policy is made to
encourage it as the mainstream fuel.
Obstacles faced by ethanol The
most significant non-political obstacle the
ethanol industry faces in the US is a lack of
infrastructure. Unlike oil and natural gas,
ethanol or gasoline containing ethanol cannot be
transported by pipeline. The current oil
refineries cannot be used for ethanol and will
need to be converted. The only viable ways of
transporting this fuel are either through trucks
or over water. This is because ethanol is soluble
in water and thus can be easily diluted or
contaminated. To develop the infrastructure that
supports ethanol will require time as well as the
investment of resources.
Most US ethanol
plants are in the Midwestern states, and that
poses another challenge. Transporting ethanol to
the energy-hungry east and west coasts is a
daunting task. One helpful factor is that the
majority of the existing and proposed ethanol
plants are on or a near a major waterway, but that
poses another challenge, the need to equip all the
ethanol plants so they can transport the fuel via
water, for example trucks needed to bring the fuel
from the site to the vessel. This is capital- and
time-intensive. Another mode of transport for
ethanol is via railroad, but this will require
special cars. In addition, ethanol would have to
compete for limited rail transport space with
coal.
Another obstacle is that owners of
E85 (85% ethanol and 15% gasoline) flex-fuel
vehicles are unlikely to use E85 if it costs more
than gasoline. For people to replace cars,
especially when they are higher in price, poses a
barrier for the consumer. The only thing that
might persuade people to buy flex-fuel vehicles is
if it has a significant cost advantage in the long
run or if it is government-subsidized.
Ethanol economics Currently, US
ethanol production cannot meet demand, and
imported ethanol is required to balance supply and
demand. For the imports to be economically
feasible, ethanol prices must be above $2.45 a
gallon (65 cents a liter). That is because if the
value of imported ethanol is 46 cents a liter,
with custom duty and transportation costs of 4
cents a liter it is viable subject to the
above-quoted price. Currently, ethanol makers can
break even with oil priced at $55 a barrel. In the
beginning ethanol production will be expensive
because the technology needs to be further
researched and developed. In the years to come,
there are chances for this technology to take off,
but at a cost.
For all the challenges
facing the US ethanol industry, efforts are being
made to meet rising demand. Over the next 12
months, at least 39 new ethanol plants are
expected to be completed. The new plants will add
5.3 billion liters a year to the current 17.4
billion. This will put the United States ahead of
Brazil. But there remains the very basic problem
of not having enough cars available that use
ethanol. Ford, DaimlerChrysler and General Motors
have flex-fuel vehicle programs under way, and the
lineup of new cars is expected to be unveiled by
the end of the year.
A look at
Brazil Similar to the United States, the
Brazilian government subsidized the production of
ethanol back in the 1970s. There was also a lot of
investment from the private sector into the
ethanol industry, sufficient to make Brazil
independent from foreign oil. Brazil is the world
leader in flex-fuel cars, and President Luiz
Inacio Lula da Silva has embraced the concept of
being independent for energy. Brazil has perfected
this technology of flex-fuel vehicles to the point
that for a Brazilian the cheapest fuel choice is
clearly ethanol.
That is because Brazil
produces ethanol efficiently and cost-effectively.
Brazilian ethanol is sugarcane-based, unlike the
corn-based version in the US, which requires more
time and money. The Brazilian auto fleet is
composed of 20% flex-fuel vehicles, and Brazil is
the second-largest producer of ethanol. The
country has taken to heart an approach of a
vehicle that can run on multiple fuels. It has
advanced in that aspect to an extent that it hopes
to export flex-fuel cars and technology around the
world. The idea for non-gasoline-powered vehicles
goes back to the 1970s fuel crises in Brazil, when
its economy nosedived. Brazilians enjoy the fruit
of that initiative in the form of energy
independence and cheap fuel.
Benefits
of ethanol questioned Many experts question
the benefits of ethanol in the US. Domestic plants
run on petroleum, leaving ethanol's net
contribution to reducing the use of oil
questionable. David Pimental, a top agricultural
expert from Cornell University, has calculated
that powering the average US automobile for one
year on ethanol (blended with gasoline) derived
from corn would require 4.5 hectares of farmland,
the same space needed to grow a year's supply of
food for seven people.
Adding up the
energy costs of corn production and its conversion
into ethanol, 34,610 British thermal units are
needed to make one liter of ethanol. One liter of
ethanol has an energy value of only 20,340Btu.
Thus 70% more energy is required to produce
ethanol than the energy that actually is in it.
Every time you make one liter of ethanol, there is
a net energy loss of 14,270Btu. Consequently,
there is a loss of energy for using ethanol as an
alternative fuel source. Moreover, that does not
include the trucks and the tankers involved with
transport, which require petroleum as well.
Despite the structural challenges facing ethanol,
there remains a certain momentum to push this fuel
as the alternative fuel to oil.
Outlook One should not be
carried away with the sudden excitement in the
ethanol industry. The investment bankers first
fueled the dotcom boom with the technology hype,
and then that bubble burst. Now it appears to be
the time for ethanol. What needs to be brought to
an investors attention is that it is difficult to
see how ethanol can go mainstream as a fuel if 70%
more energy is required to produce ethanol than
the energy that actually is in it.
Constant recommendations to buy the stock
of ethanol companies and all the hype that is
going into ethanol appear to be temporary because
global oil prices have forced the world to seek
alternative energy sources. The candidates for
alternative energy such as butanol, hydrogen,
wind, and biomass are also under constant
research-and-development focus. Butanol, which is
produced from sugar beet, is more environmentally
friendly and cheaper than ethanol. Will butanol,
hydrogen, wind, and biomass be able take over
ethanol's pace?
An intelligent investor
will not go with the market hype and will be
mindful about the threats that ethanol faces from
the other sources of energy and varying crop yield
controlled by the weather. At the same time it is
clear ethanol is one of the options now under
development within the alternative-energy sector,
and it needs to be monitored to determine its
potential impact on efforts to expand beyond
global reliance on petrochemical products.
(Posted with permission from KWR International, Inc, a
consulting firm specializing in the delivery of
research, communications and
advisory services.)
