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?