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Ishwar Khatiwada


Here Cometh Ethanol Revolution!

Ethanol revolution in the U.S. is finally materializing. The rising oil prices, increasing aggression between the U.S. and oil producing Middle East, and much real and much talked about global warming are helping usher this revolution. Yesterday, the U.S. Department of Agriculture (USDA) released its much anticipated report on “Prospective Planting”. The report revealed that U.S. farmers are expected to plant 90.5 million acres of corn in 2007, up 15% from the last year. The 90.5 million …

………………acres of corn planting is the highest recorded since the World War II. This increase was solely led by an increase in demand for corn used in producing Ethanol. The undergoing Ethanol revolution is attributed to the aforementioned factors coupled with huge flow of venture capital investments in alternative energy, invention of new and improved technology in the production of Ethanol, and growing consumer demand for Ethanol.

Everybody from Wall Street to venture capitalists to investors is investing millions of dollars in alternative energy start-ups. Bill Gates, Richard Branson, Vinod Khosla, Ron Burkle, Steve Case, and many other big name investors have poured millions of dollars in start-ups geared up in developing alternative energy. Recently, founders of Google Larry Page and Sergey Brin jumped into the Ethanol Bandwagon with Vinod Khosla. In Washington too, politicians are very vocal about promoting alternative energy producing companies by giving tax incentives, mandating auto makers to make fuel flexible vehicle, and making grants for research and development in alternative energy through U.S. Department of Energy (DOE). The 2008 Presidential candidates are touting this issue as one of their main agenda in upcoming Presidential campaign. These positive developments in alternative energy fronts are very likely to make U.S. less reliant on foreign imported oil and ultimately make the nation, in the long run, self-reliant on energy.

Is it possible to produce Ethanol in such a large amount? If so, how could it be done? What are the current obstacles? What are the benefits from Ethanol? What critique on Ethanol say? Should investors put money in Ethanol producing companies? I have been following unfolding of Ethanol revolution for sometime and in the following section I will try answer each of these important questions.

It all started in Brazil in the 1970s. Brazil is the pioneer in the production of Ethanol and has a proven track record for making Ethanol the substitute of petroleum oil. Ethanol is not only environmental friendly but also cheap. In a span of few years, more than 80 percent of vehicles in Brazil run in Ethanol. The world is lauding Brazil’s astounding accomplishment in this sector. Ethanol market in Brazil in recent years is unfettered, not run in government subsidy but solely on consumer led demand. If Brazil can do this; U.S. too can do this. Ethanol production in the U.S. has increased exponentially recently. For example, Ethanol production has increased from 1.3 billion gallons in 1997 to slightly under 5 billion gallons in 2006, an increase of 285% in less than 10 years. This translates into annual growth rate of 16%. However, the consumption of 5 billion gallons of Ethanol account for only 3% of total annual petroleum oil consumption in the U.S. Currently, there are more than 114 Ethanol producing plants in the U.S. and many more are under construction. The forces of market are coming together to make it happen (except the big oil companies).

Currently, there are more than 5 million flex-fuel vehicles on the road in the U.S. This is a promising statistics I did not know until recently when I watched video of Vinod Khosla’s presentation at Google. The U.S. has enough infrastructures for Ethanol production. The auto companies are willing to produce more flex fuel vehicles, but the Ethanol pumps are simply not enough. The big oil companies do not want Ethanol pumps in their place as the new fuel will kill their business. The oil companies know very well that even if they support Ethanol pump, their fat profit margin from imported oil will vanish.

The U.S. has sufficient capacity to supplant imported petroleum oil from Ethanol and other alternative fuel. The land is plenty for cultivation of ethanol and bio-fuel inputs. The land is already in existence for both celluloid (ethanol produced from other than corn such as prairie switchgrass, forest waste, construction waste, etc.) and non-celluloid ethanol input production. The costs in making flex-engine for automakers are extremely minimal. What is lacking is an additional Ethanol pump in gas stations.

Critics argue that Ethanol takes equal or even more energy to make than it does produce, i.e., energy returned on energy invested in equal to one- not efficient. Ethanol production also generates environmental harm through overuse of land resulting in land degradation and increase in food prices. In addition, production of Ethanol from corn is not sufficient to supplant fossil oil. Nonetheless, there are emerging new technologies to help produce ethanol more efficiently. A recent DOE report concludes that environmental and energy benefits from ethanol are much more superior than petroleum based fuels.

Growing Ethanol market is win-win for all. The U.S. government will save billions on farm subsidies as farmers will in fact make profits from cultivating Ethanol inputs. The Midwest states and rural America, which lag economically, will reap windfall prosperity as farms are concentrated in those regions. The U.S. government will save $250 billion dollar that it spend annually in importing oil from the foreign countries. The consumer will benefit from low cost fuel.

Investment in alternative energy market looks promising. According to Bloomberg, top 10 eco-friendly funds posted annual return of 39 percent last year. In the U.S., Boston based Winslow Green Growth, Winslow Management, posted an annual return of 37 percent recently. So, here cometh Ethanol revolution from the Midwest not from the Middle East!