Avoid Biofuel Bubble

An old Midwestern maxim deems a corn crop healthy if it’s ``knee-high by the fourth of July.’’
Yet when it comes to the expectations that corn-based ethanol will cure America’s dependence on foreign oil, the hype is way over everyone’s head.
Running the numbers on how much land could be put into production for corn-based ethanol makes it clear how little of the fuel could be produced to help curb America’s energy gluttony, Bloomberg said.
There isn’t enough suitable land for corn growing to make a significant dent in America’s voracious energy needs. Yet that hasn’t stopped ethanol investors or a wave of irrational exuberance from Wall Street to Brazil. You can see the ethanol frenzy at more and more gasoline stations.
The number of fueling outlets providing gasoline with ``E85,’’ or gas containing 85 percent ethanol, is now more than 1,200, compared with less than 750 stations last year, to service more than 4.5 million flexible-fuel vehicles, according to the National Ethanol Vehicle Coalition. There are 110 ethanol plants running in the US, with 73 more under construction.
Bolstered by President George W. Bush in his State-of-the- Union speech, it’s projected that US ethanol production will reach 35 billion gallons per year in a decade--double the current level.
Yet there’s a resource issue that’s rarely mentioned in all of the ethanol cheerleading.
In order to grow corn, you need lots of land, water, fertilizer and fuel. Most of the commodity is cultivated in Iowa and Illinois where the rainfall is usually sufficient and the soil rich enough for high-yield corn.
Say you were able to cultivate every acre of Illinois for corn-based ethanol. This is purely hypothetical as it would involve bulldozing Chicago and other cities and towns in the Prairie State. As an Illinois resident surrounded by cornfields, fleeing demolition is not my relocation fantasy.
One of the potentially most productive corn-growing states on the planet would yield about 5.7 billion bushels of corn and 16 billion gallons of ethanol, according to Charles Washburn, professor emeritus at California State University in Flagstaff, Arizona. He has researched the subject over the past 45 years.
The Illinois mega-crop would provide only 0.8 percent of annual US gasoline and diesel-fuel use, Washburn estimates, subtracting the energy it takes to create ethanol.
Of course, US energy consumption isn’t a static beast. Washburn further projects that ``a new corn field the size of Illinois would be required to meet our transportation energy growth every seven months.’’
Even if every bushel of US corn, wheat, rice and soybean were used to produce ethanol, it would only cover about 4 percent of US energy needs on a net basis, Washburn estimates.
The US, in its quest to reduce its reliance on expensive imported oil, may soon consume as much as half its domestic corn crop for fuel production, though the economic benefits have yet to materialize. Ethanol produces one-third less energy than a gallon of gasoline at an average wholesale cost of 33 percent more, according to a US Government Accountability Office study.
The demand for corn bound for ethanol use has farmers planting more of the golden kernels than they have in 63 years on more than 90 million acres.
Since corn growing is energy- and fertilizer-intensive, that means more water pollution and less corn for food stocks.
Most fertilizer is produced from natural gas, a byproduct of oil drilling that is rising in price.
The other byproduct of the ethanol obsession is more- expensive food. Higher corn prices have boosted the cost of producing beef, poultry and thousands of processed products.
Food prices have climbed an average of $47 per person due to the ethanol surge since last July, price futures reached a 10-year high of $4.28 a bushel in February. All told, ethanol has cost Americans an additional $14 billion in higher food prices.
These increases have also pushed up sugar prices, which rose to a three-month high in New York on July 18 on speculation that demand for the commodity will strengthen to help produce ethanol, an alternative to oil. Brazil is the largest sugar grower.
Meanwhile, the US government has yet to discover whether its 51-cent-per-gallon ethanol subsidy is efficiently stimulating production of the fuel. One thing the bureaucrats know for sure: It cost the US Treasury $2.7 billion last year with possibly more subsidies on the way.
The ethanol reality hasn’t fully sunk in on Wall Street. The ABN Amro Biofuels Index has fallen 3 percent this year. Houston-based Gulf Ethanol Corp., which has a market value of about $24 million, has gained 40 percent.
Archer Daniels Midland Co., based in Decatur, Illinois, has added 14 percent. It is the largest US processor of ethanol.
Those who bet exclusively on ethanol will suffer the same fate as those investors who took the plunge on fiber-optic, Internet and computer-router companies in the late 1990s. They will concentrate their risk when prices are at a peak--and then get burned.
For a broader sampling of biofuel and alternative-energy stocks, try an exchange-traded fund such as Market Vectors Global Alternative Energy ETF, which tracks a basket of companies that invest in wind, solar and biofuel technologies, or the Powershares Wilderhill Clean Energy Portfolio.