Ethanol Is Running Out of Gas

Who'd have thunk it? According to The Wall Street Journal, it appears there's now an issue that has managed to unite such disparate elements as the petroleum industry, livestock farmers, environmentalists, the American Lung Association, and big corporations H.J. Heinz (NYSE: HNZ  ) and PepsiCo (NYSE: PEP  ) .

The issue is ethanol -- or opposition to it -- and it appears that the corn-based petroleum substitute has gone from panacea to pariah in the U.S. in just one growing season. Given all the opposition to it, suddenly struggling ethanol is likely to face considerable difficulty recovering its footing anytime soon.

This thing called ethanol
As most Fools know by now, U.S.-produced ethanol is usually made from corn (Brazil has long manufactured it from sugar cane) and blended into the gasoline manufacturing process by refiners, replacing a like amount of the oil-based fuel. In a nation that uses about four times as much oil every day as it produces, ethanol originally caught on as a means of lessening our dependence on foreign crude.

And it seemed like a godsend when it was first introduced. By early 2005, in his State of the Union speech, President Bush had pushed for its increased use. Beyond that -- and this is especially disturbing to yours truly -- it is a key element of the president's plan to reduce our dependence on foreign oil.

The numbers
Recently, the ethanol industry and its strong lobby have run into problems that are at least partly economic. For instance, after sitting for decades at about $2 a bushel, the price of corn has almost doubled thanks to the use of the crop in ethanol. This has angered livestock and food companies, whose own economics are closely tied to corn prices.

And there are other economic considerations, as well, in what has become a skirmish between pro- and anti-ethanol groups. For instance, the U.S. government now gives a $0.51 tax credit to refiners for each gallon of ethanol they blend into their gasoline. This bit of largesse has made fans of big refiners like Tesoro (NYSE: TSO  ) and Valero (NYSE: VLO  ) , which now need to pay only about $1.85 a gallon for their ethanol mixer, down more than 60% in just 18 months.

The problem for ethanol producers, including VeraSun Energy (NYSE: VSE  ) , Pacific Ethanol (Nasdaq: PEIX  ) , and Aventine Renewable Energy (NYSE: AVR  ) , is that economic trends haven't exactly gone their way. As corn prices have risen and ethanol's value has dropped, their profit margins have plummeted from about $2.30 a gallon a year ago to a current rate closer to $0.25.

Problems for everyone
But the bigger difficulty for the nation, it seems to me, is that ethanol has been boosted -- by the president, the Congress, and the Midwest farm lobby -- from what should have been one among many solutions to our worsening energy situation to essentially be-all-and-end-all status. Indeed, in looking specifically at the president's leadership on the broad energy subject, I'm forced to note that (as my Foolish friends well know) he once governed Texas, which is still the home of more energy companies than all the other states combined.

Beyond that, before entering politics himself, President Bush's father helped to build two big energy companies (Pennzoil and Zapata Offshore). So it's more than a little disappointing -- and this is hardly a political comment -- to have the administration's energy proposals essentially limited to calls for drilling in the Arctic National Wildlife Refuge (a Band-Aid, at best), a push for greater use of ethanol (which has already demonstrated negative consequences), and support for a tightening of automotive fuel efficiency standards by 2020 (too far off to help).

And don't look for energy leadership from the Congress, either. The Senate, which clearly doesn't appear to have any grasp of our real energy needs, has included in its version of the work-in-progress energy bill a requirement that fully 36 billion gallons of renewable fuels be used by 2022, with more than 40% set to come from corn-based ethanol. The House of Representatives, when it isn't maneuvering to tax the oil companies back into the Stone Age, is seeking to promote ethanol pipelines.

The slick ending
But, as physicists have told us, what goes up must eventually come tumbling down. And while ethanol once seemed like a good idea, like a lot of initially sensible notions, it appears to have been carried to an illogical conclusion. With the product clearly descending on a number of fronts, we can only hope that now we'll be blessed with a more sensible and longer-range approach to our nation's crucial energy needs.

For related Foolishness:


Read/Post Comments (0) | Recommend This Article (47)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

DocumentId: 547023, ~/Articles/ArticleHandler.aspx, 4/24/2014 7:20:24 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement