Despite President Barack Obama's best efforts to the contrary, ethanol isn't a very popular energy source. It's generally cheaper than gasoline, but the advantages mostly end there. It burns cleaner than regular gasoline, but the total environmental impact is about as bad, considering the energy-intensive process of creating it. It has problems traveling through existing gas pipelines, so it has to be shipped by truck, further negating some of the environmental benefits. The most damning issue with ethanol is that it serves as a bridge between fuel for people and fuel for machines.
About 40% of the corn crop in the United States will be used for ethanol production this year, up from just 8% a decade ago. The actual crop has not risen nearly enough to absorb that much extra demand, leading to a doubling of the price of corn. And because the price of corn is so high, farmers are incentivized to plant more of it than they ordinarily would, crowding out other crops such as soy, which has also doubled in price as supplies become constrained. To a lesser extent, the increased demand for corn has also contributed to the rising price of inputs such as fertilizer and farmland, as well as products that must cope with rising corn prices, such as livestock.
Problems at the pump
Despite all that, ethanol companies have one major thing going for them -- ethanol-blending mandates. E10, a blend of 10% ethanol and 90% gasoline, is generally the maximum blend allowed by the EPA and is mandated in only a handful of states. However, more than 90% of the gasoline sold in the U.S. is a blend of some kind, and the EPA is considering raising the limit to 15% ethanol (E15). In theory, that could mean far more ethanol sold.
But that's just in theory. Twelve different automakers have come out against the proposal, including heavyweights Ford
A stream of difficulties
As for ethanol companies themselves, they have done poorly. By 2009, about 9% of all ethanol plants had filed for bankruptcy, including high-profile cases such as VeraSun and Pacific Ethanol, which emerged from a Chapter 11 restructuring in 2010 but has continued to struggle. The loss of so many companies hasn't separated the wheat from the chaff, however, as many have simply restructured, like Pacific Ethanol, or been purchased by survivors, as Green Plains Renewable Energy
Even diversified companies have suffered. Grain king Archer Daniels Midland
The Foolish bottom line
Obama is pushing hard for more ethanol use, and some companies, such as Pacific Ethanol, are exploring production with other inputs such as algae, wood, and grass. These other forms may be more economical and have fewer negative side effects. Unfortunately, they are a long way from the mass production corn ethanol enjoys. Ethanol isn't going away anytime soon, but don't be surprised if the companies that produce it do.
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Fool contributor Jacob Roche holds no position in any of the stocks mentioned. Check out his Motley Fool CAPS profile or follow his articles using Twitter or RSS. The Motley Fool owns shares of Ford Motor. Motley Fool newsletter services have recommended buying shares of Ford Motor. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.