Why Conventional Ethanol Policies Are a Scam
By Jeff Clark
February 13, 2007
It's promoted as the answer to energy independence.
It's touted as the solution to global warming. It's hyped as a way to actually clean our air. It's a bird... It's a plane...
It's corn-based ethanol. And unfortunately, it's a scam.
Okay, "scam" might be a little harsh. Let's just say ethanol is an inefficient alternative fuel that can't possibly live up to the hype.
The hype climaxed this past summer as the shares of every company even remotely involved in the production, transportation, or marketing of ethanol surged to all-time highs. The shares have since fallen back down to Earth. In fact, most of the stocks have given back as much as 60%-70% of their gains.
The declines suffered by the likes of Pacific Ethanol and VeraSun Energy have been so severe that I thought I might be able to find a few bargain-basement ideas in the ethanol sector recently.
I was wrong.
The economics of the ethanol industry are simply not suitable for longer-term investing, say, five years or more. But first, let me tell you why the general furor over ethanol will be short-lived.
You see, creating ethanol involves taking feedstock – typically corn or grain – and heating it so that the sugar in the feedstock separates from the starch. Yeast is added to ferment the sugar to ethanol. Then the ethanol is distilled and the water is separated from the mixture through dehydration. It's a relatively simple process. But there are two main elements that make it inefficient from a cost/benefit perspective...
1. Using corn as feedstock is expensive:
2. Natural gas is used to heat the feedstock to separate the sugars from the starch
Like I said, it's an inefficient alternative fuel. But don't bother telling that to the folks in Washington. They love the idea of ethanol. After all, in Washington, D.C., no bad idea goes unfunded.
When it comes to investing, politics do matter. The party that controls the legislature gets to decide which pet projects to invite indoors to lie down by the fire and which pets to kick to the curb. And, under the new regime in Washington, no pet is more spoiled than renewable energy – aka, ethanol.
Not that Republicans abused the creature. In fact, the ethanol industry benefited quite well from the Energy Policy Act of 2005. But under Democratic leadership, Congress likely will expand many of the act's mandates, such as the increased use of ethanol as a fuel additive. And that means it's boom time for the ethanol industry.
Already, companies including VeraSun, Pacific Ethanol, and Aventine Renewable Energy are announcing record revenues and record profits. But it won't last |
