Ethanol production - the potential future of renewable energy, the law, and the markets

Oil at $100+ per barrel. Corn at $5 per bushel. Neither is a positive depending on who you ask and what their primary concern is. Neither of them is going to go down in the near-term either.

Why is that important? Because the high cost of oil, and the fact that it will run out in the foreseeable future, requires alternative fuels development and implementation. Those are facts that everyone agrees upon. Equally, because the primary alternative fuel in use now is ethanol, derived mainly from corn kernels, the cost per bushel is increasing. That arguably is increasing the cost of food prices throughout the world, hurting the poor. Not quite a fact, but a possible outcome.

So what is the result? In the U.S. markets ethanol manufacturers are falling, some dramatically by 50%. That’s because there is, or was, a glut of ethanol. I say was because in December 2007 law was enacted to increase ethanol production dramatically.

“Bob Dinneen, president of the Renewable Fuels Association, said the requirement in the bill that calls for 9 billion gallons of ethanol this year "obliterates anybody's notion that there is a glut of ethanol out there." Current ethanol usage is about 6.5 billion gallons per year.”

The goal of the law is to increase ethanol use in the United States to 10% of every gallon of gas. That ultimate goal is no small task.

As I mentioned previously,

“Another fact is that ethanol, regardless of blend or if used 100%, is less fuel efficient than gasoline. It takes more ethanol to go as far as with gasoline. Estimates range but roughly ethanol is 2/3 as effective as gasoline. Thus more needs to be used.”

Add to that the even bigger issue of

“…the fact that ethanol is virtually unavailable anywhere outside of 2 states in the nation. Outside of Illinois and Minnesota there are almost no stations offering ethanol to the public. In 4 of the most populous states across the nation (New York, Texas, California, and Florida) there are only 2 stations selling ethanol to the public combined.”

Still the use of blends of ethanol over the recommended levels stated by the Government did increase by 50% in 2007. And claims by Dinneen state that federal farm subsidies for corn decreased by $8 billion and the subsidy for ethanol only cost $3 billion, thus creating a surplus of $5 billion.

It seems that no matter where you stand on the issues there are virtually as many positives as negatives. I will say that no matter what the Government mandate, the actual extent of the current surplus, the fact that 80 additional ethanol plants are planned to be created as of this date, or the cost of oil and corn – none of it will matter if a majority of the nation does not have access to ethonaol fuel.

I previously mentioned [in prior posts on this blog] that such fuel will cost the average American more, no matter what, because of the loss of efficiancy. I already know of a few people that go out of their way (into a neighboring state) just to get non-additive fuel because the difference in efficiency is worth the trip and cost.

But no matter the issues, there is always a positive to any industry where the major players are publicly traded stocks. As I mentioned above there are many ethanol stocks that are suffering. The alternative fuel market is mired in sentiment of a current oversupply, future oversupply, and an unknown path to the enactment of the federal mandate. Yet over at TheStreet.com there are thouse with a positive outlook.

Chuck Marvin feels that beyond the short-term of 2008 there is opportunity in the inevitability of increased ethanol use. To that end he picked 5 ethanol based alternative fuels stocks that he sees surviving this murky period. Those stocks include industry production leaders VeraSun, Archer Daniels Midland, and lesser names like Green Plains Renewable Energy.

Pick your path, save your cash and realize that this is not the end of the story. Ethanol is beginning its part in the path to renewable energy and an end of oil dependency. Like most uncharted paths, the road is bumpy and pioneers sometimes are unsure of their way, but eventually you will finds what you are looking for. To that end, so will we.