Ethanol Steps to the Ledge

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I'm not sure the renewable energy community would ever cheer the death of subsidies for a fellow renewable, but after the Senate voted to repeal ethanol tax credits, I heard a quiet golf clap from wind and solar boosters. Ethanol has been a touchy subject -- popular in agriculture-heavy states like Iowa, Minnesota, and Nebraska -- but the realities of the "renewable" fuel never quite added up, and Congress has apparently gotten the memo.

The main problem is that the physics of "renewability" never really worked for corn-based ethanol. Studies have put the energy output of making corn-based ethanol at around 1.5 times the energy put into the process for making it. The corn-based product isn't nearly as efficient as sugarcane-based ethanol produced by Cosan (NYSE: CZZ  ) , plus it takes food out of the market, indirectly raising food costs.

What's next
The ethanol debate isn't dead in Congress, but it has taken a turn for the worst. The bill hasn't been through the House, and the White House opposes it -- but with 73 of 100 senators voting to cut the subsidy, it appears to be only a matter of time until it's gone.

The new ethanol
This setback doesn't mean the search for alternative fuels is over; the Senate just decided it was done supporting one that was never going to get cheaper. Now it should be time to turn our attention to newer, more promising technology. Yes, I'm talking about algae.

ExxonMobil (NYSE: XOM  ) made a push into algae biofuels last year, and Solazyme (Nasdaq: SZYM  ) came to the stock market this year with its microalgae bioproducts. Solazyme can make more than fuel from its algae, and that flexibility may keep its hope for a fuel alternative alive.

There are other companies turning everything from animal fats to wood chips into fuels and other products. Amyris (Nasdaq: AMRS  ) , Syntroleum (Nasdaq: SYNM  ) , Rentech (AMEX: RTK  ) , and Gevo (Nasdaq: GEVO  ) are some of the main companies that may see the blow to ethanol as a positive for their business.

These alternative fuels aren't nearly as mature as the existing ethanol market in the U.S., but they aren't as dependent on subsidies, either. In a time of budget deficits, an alternative energy source that can stand on its own two feet should be a welcome sight.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

The Motley Fool owns shares of Amyris. Motley Fool newsletter services have recommended. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (10)

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.

  • Report this Comment On June 17, 2011, at 3:03 PM, Melaschasm wrote:

    One cautionary note.

    This bill does not remove the requirement to blend ethanol with unleaded gas. It only ends the subsidy for US corn ethanol, and removes the tax on Brazilian sugar ethanol.

  • Report this Comment On June 17, 2011, at 3:15 PM, snafu03 wrote:

    I really wish people would get better versed on ethanol instead of repeating the same false stereotypes over and over. Corn ethanol is made from one specific part of the grain, corn starch, and the rest of the grain and it's associated nutrional content is passed on to the biproducts. How big of an impact to our food supplies is removing corn starch? How much brown gravy do we really need to make? The other major use of corn starch is converting it to high fructose corn syrup. We've all heard how bad that is for us... Just as the starch is of little value in our diets, it's also of little value in livestock diets and most corn is used to feed livestock. The vast majority of the nutrional value of the grain used in making ethanol are passed onto the biproducts which happen to primarily be used for cattle feed. Where's the huge impact to the food supply? There isn't one!

    The problem with corn ethanol is and always has been government subsidies and intervention. The subsidies create market imbalances that can cause massive price swings. A perfect example is the price of dried distillers grains (DDG), one of the primary biproducts of making ethanol. Pound for pound, DDG are much more nutritious than corn as cattle feed yet sell at about 70% the price corn does. They should be selling for a premium to corn and if they were, an ethanol maker wouldn't need as high of a price per gallon to break even. But the subsidies have allowed ethanol manufacturers to maintain profitability without developing sufficient markets for the biproducts produced. Cattle producers have been slow to adopt the ethanol biproducts as corn replacements which has corn demand unnecessarily outpacing supply and sending prices through the roof. So it's easy to see if you do some research that corn ethanol isn't that bad, but government pretending to be smarter than market forces is...

  • Report this Comment On June 17, 2011, at 3:27 PM, TMFBlacknGold wrote:

    Corn for ethanol raises food prices by taking up land that can be used to grow other food. When the government is footing the bill farmers rush to convert land to grow bushels of corn because they can be heavily compensated to do so. So, you're kind of right.

    Aside from that, GEVO, Amyris, and Solazyme all have major issues that aren't readily solved: feedstock. How does anyone expect algal fuel to replace any major portion of our fuel consumption when it requires millions of tons of feedstock (ie sugar)? Amyris has been signing contracts/partnering with sugarcane producers, but there are a finite amount of sugar processing plants available. The feedstock issue must be solved before any one of those companies can think about being a major player.

  • Report this Comment On June 19, 2011, at 8:17 AM, Clint35 wrote:

    Now If they'd stop giving subsidies to the oil companies then they'd really accomplish something.

  • Report this Comment On July 28, 2011, at 6:54 PM, ershler wrote:


    Ethanol also lowers food prices by decreasing the price of fuel, which is often a larger portion of the cost of food then raw ingredients.

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