Is Ethanol Really A Viable Alternative Fuel?
About 4 years ago I was sitting in a big hotel ballroom. I was attending an alternative energy conference in Washington DC. The movement to new energy technology was just starting, and the conference was still small in size. My job was to identify the most promising companies . . . and meet with their CEOs.
It was here that I first met Matt Simmons.
He was one of a long line of speakers that day, but I remember him best. He was giving a presentation on oil. He held up a cup of coffee saying on a cup for cup basis, Americans were paying significantly more for coffee than oil. His entire presentation was about the supply and demand of oil. He explained why prices were set to increase further. He discussed in detail the problem of peak oil, and why we were at the end of easy oil.
When he gave his speech, oil was trading hands around $30 a barrel.
Matt had studied the major oil finds in Saudi Arabia. He analyzed old reports and he scrounged for everything available. He even interviewed old oil men who had worked the fields.
The result of his research was a book on his findings. He called the end of easy oil. He called for peak oil and the eventual price increase. I don’t think even he knew how right he’d be.
Needless to say, when it comes to oil Matt knows his stuff.
That’s why I read with interest a recent interview he gave in Oil & Gas Financial Journal.
I know I read some really strange stuff . . . but you never know where a great idea is going to come from.
Anyway, they interviewed Matt and one of the topics was ethanol. I sat up and took notice. Ethanol has been held up as a key alternative to oil in the US. Unfortunately, I don’t think it’s the Holy Grail it’s made out to be.
Matt apparently agrees. He had this to say about Ethanol:
“It is one of the most cruel and vicious scams you can imagine. It’s a very energy-intensive product to create and what you end up with is a very poor source of energy.”
Now those are fighting words if I ever heard them. But the scary part is, he’s right.
Ethanol is a great product . . . if you live in Brazil. A significant portion of their economy has transitioned over to ethanol. They grow sugar cane, which is then processed into sugar. The sugar is fermented to produce ethanol. And that ethanol powers a big portion of their economy.
The problem in the US is a simple one. Sugar cane doesn’t grow all over the US like it does in Brazil. So we need to use our biggest crop – corn.
Corn however is used not only to feed humans, but also in the production of meat. This creates an interesting trade-off. Food or Fuel?
Ethanol does have a place in America. But I believe it’s a small one. Currently ethanol is used as an additive to gasoline. In that role it helps keep our environment clean. But transitioning from oil to corn based ethanol is not only stupid, it’s not practical.
The solution is cellulosic ethanol.
Ever hear of it? Cellulosic ethanol is still a few years away from wide scale development . . . but not as far out as many people think. Cellulosic ethanol is an ethanol production process which breaks down the cellulose of a plant. The cellulose is converted into starches and sugars. And these are eventually converted into ethanol.
It’s a complex process. I won’t bore you with the technical details.
This is why cellulosic ethanol is so important. The process could convert wood chips into ethanol. It could convert corn stalks into ethanol. Basically any plant matter could be turned into ethanol. No-more “Food or Fuel” decision.
We could grow corn to eat, and use the stalk for powering our cars. Just think of the potential.
There are many small companies working on different ways to commercialize the cellulosic ethanol process. Unfortunately, not many are worth a second look.
One company I like however is SunOpta (STKL). Strange I know. The company is primarily focused on food products. They have a $500 million market cap, and are expecting revenues to be around $1.0 billion. But the interesting part of the company is their division focused on cellulosic ethanol production.
They’ve been doing some really interesting stuff. In the course of full disclosure, I worked on one of their financings a few years ago. You might take a position in SunOpta. It’s an interesting way to play the future of ethanol in America.
Category: Commodities
