Irrationally Exuberant Ethanol

Disclaimer: I don’t know anything about cleantech and – more specifically – the ethanol market.  However, I do understand basic economics reasonably well and have pretty good reasoning skills, although I’ve probably forgotten most of the math I learned in grad school about IS-LM curves.  Oh – I’m also a huge tree hugging environmentalist.

My PIDS (personal information discovery system – aka Amy) has continued to catch up on her RSS feeds and forwarded me an article by Daniel Gross in Slate titled Is The Ethanol Boom Going Bust?   It was short enough for me to read on my handheld while filling up my car with E85 (just joking – I can’t seem to find a gas station nearby me that actually has E85 – it seems to kind of defeat the purpose to drive 30 miles each way to fill up with E85 – although the article was short.)

I think the free market dynamics around ethanol – and the second order effects – are fascinating.  Gross does a good job – in a short article – of highlighting some of what is going on in the market.   My favorite paragraph is his nice linkage back to the dot-com boom, a market I’m very familiar with.

“In other words, the lion’s share of inducements have gone to production—call it supply-side energy policy. But crudely stimulating this ethanol is actually the cause of the ethanol backlash. As production increases, the price of the commodity used in the process (corn) rises. So does the price of the expertise and materials needed to build capacity. During the railroad boom, the cost of steel and the salaries of engineers rose. During the dot-com boom, the cost of fiber-optic capacity and the salaries of Web programmers rose. The Wall Street Journal reported that the cost of building a new ethanol plant has risen from $1.50-per-gallon last year to $2.20 per gallon today.”

An earlier article of his, titled The Ethanol Backlash, is equally fascinating.

Supply-side energy policy and inflation anyone? 

  • A client of mine- who makes organic Indian food, not fuel- told me recently that her biodegradable packaging is “corn free”. Enter the corn backlash on the heels of the ethanol backlash.

  • I read a recent interview of Bob Metcalfe where he says (paraphrasing) “Bubbles are good – they speed innovation by attracting lots of investment.” Too much investment…

    This concept sits well with me, harsh as it may seem because most of the participants (and their investors) in bubbles will lose. Look what it did to the nascent car industry decades ago, or to the Internet, or to the telecom industry, or to Web 2.0 companies, or what it will do to ethanol/energy sources here in the U.S.

    My belief is that bubbles only hurt the economy in two areas where the result is not technology advancement – real estate and the stock market. Breaking bubbles in those two industries don’t really leave pieces to be picked up and reassembled into something greater than before.

    The U.S. has always been a boom and bust kind of place, taking two steps forward and one and a half back in whatever industry you want to name.

  • If the Government does not spend money on Ethanol incentives it will spend it on price supports for Corn. I would buy Ethanol stocks and hold on to them for five more years. When oil is $100 a barrel, there will be more flex cars that can switch between gasoline and ethanol!

  • The focus on corn as a source for ethanol in the US is entirely driven by corporate interests, specifically ADM and the sugar industry. ADM owns the corn refining and commodity business. The sugar people have received ridiculous price protections that have kept cheap cane out of the US for a hundred years. In South America they’re making ethanol much more efficiently with cane.
    The trickle down with corn is that virtually every processed food product in the US has a corn component. Corn prices rising because of diversion of corn into ethanol mean that our fantasies about ethanol are being paid for by those least able to afford it.

  • Tony Arcieri

    There’s a Boulder-based startup trying to create a closed-cycle process to convert algae into biofuel, using CO2 from coal power plants to boost algae yields (and O2 produced by the algae to boost the burn efficiency of the coal):

    Sounds like a lot better approach than corn ethanol…

  • Thanks for the snippet and link. I’ve been a big arguer on the side that we’ve tried ethanol once in the 50s (i think) and it didn’t work then. Those who fail to learn from history… 🙂

    Both Wired and National Geographic have articles about ethanol this month. I have only read the Wired article and am about to start the National G one. In Wired, it is pointed out that we do not have near enough farmland in America to create the amount of ethanol we need. Cost is another issue and so is the energy netted after accounting for the energy necessary to grow and create ethanol. I’ll give you a hint, best case its still as polluting as regular petroleum based fuels.

    The cost issue is being worked on but all that money would be better spent on a technology that is proving much more viable (and economical to produce). That “tech” is reclaiming and then cleaning all the used cooking oil.

    MAKE: magazine covered bio-diesel in their first issue, Dirty Jobs (on the Discovery Channel) featured a man that makes his own – 55 gallons at a time, UC Berkeley has a Bio-Diesel Oasis and there are myriad sites on how to convert a diesel to bio-diesel.