Viewpoint
President George W. Bush has set a goal for more ethanol, and the ethanol industry has responded to the challenge. The country currently produces 5.4 billion gallons of ethanol yearly (BGY). Plant expansions representing 2.1 BGY are now under construction. More are planned. Wisconsin has five distilleries producing 188 MGY. One more is under construction and two are in the planning stages. Two are expanding capacity at their existing plants.
The Renewable Fuels Association, an industry trade group, predicts there will be over 10 BGY in the fuel supply by 2012. This represents an annual increase in ethanol production of nearly 20 percent.
Forty-five distilleries to be built or expanded in the next few years will be larger and more efficient than older plants. The amount of energy each plant uses has fallen 70 percent. And distillers now recycle the heat and steam used in fermentation.
The president isn’t the only one gushing about ethanol. Al Gore and the Democrats have embraced ethanol as a way to reduce global warming. Wisconsin Gov. Jim Doyle recently announced he wants one-fourth of Wisconsin’s energy needs to come from renewable sources by 2025.
Why ethanol?
Ethanol production is relatively simple. During the Prohibition years, thousands learned the process, built the equipment and made corn whiskey at home. The Internet is loaded with do-it-yourself instructions. The technology is neither new nor complicated.
In brief, corn absorbs energy from the sun. Refineries convert this energy to liquid ethanol. It is then combined with gasoline typically in a 10 percent ethanol, 90 percent gasoline ratio known as E-10.
More and more, environmentalists, government officials, auto companies and drivers are realizing the benefits associated with ethanol.
Ethanol contains 35 percent oxygen, resulting in cleaner, more complete combustion than gasoline, with fewer harmful tailpipe emissions. It is also better for your car’s engine because it burns cooler, with less carbon buildup.
Many new cars are E-85 compatible, meaning they can operate on an 85 percent ethanol mix. E-85 is 102 octane, higher than gasoline’s typical 87 to 93 octane. And ethanol-capable cars need no special engine, as do electric hybrids.
The American Lung Association credits ethanol with reducing smog in Chicago by 25 percent since 1990. Ethanol even helps prevent your fuel line from freezing in winter.
Investors like ethanol, too.
• Billionaire Bill Gates invested $84 million in Pacific Ethanol this year.
• Vinod Khosla, founder of Sun Microsystems, has invested heavily in ethanol production. He has also bankrolled a campaign for a California ballot initiative that, if approved, could raise up to $380 million a year to develop alternative fuels.
• Goldman-Sachs just (May, 2006) announced a $30 million investment in ethanol production
• Morgan Stanley bought Aventine Renewable Energy three years ago for $66 million. (Today, that investment is worth about $750 million, according to the company’s 10K report.)
Booming industry
Several factors contribute to the growth of the industry:
1. High oil prices. Ethanol’s chief competitor, gasoline, now over $3.00/gallon, could be as high as $5.00 by 2012, with spikes to $6.00 or more. By 2012, it is estimated that U.S. fuel consumption for automobiles will total 160 BGY.
2. Aggressive promotion of alternative-fuel automobiles. The auto industry loves ethanol. Daimler/Chrysler has promised that a fourth of its cars will be E-85 compatible by 2008. Ford Motor Company has promised 300,000 E-85 cars by 2007. The company is also partnered with Vera Sun, a major refinery, to develop E-85 gas stations from Chicago to Kansas City. General Motors is urging the U.S. government to boost subsidies for ethanol production and to give tax breaks on E=85-compatible vehicles. Top management also requires all GM executives to fill up with E-85. GM will produce 500,000 E-85 vehicles for 2007.
3. Public concern over dependence upon foreign oil and foreign trade deficits. Two-thirds of the planet’s known oil reserves are located in the volatile Middle East. The U.S. spends roughly $50 billion each year protecting oil interests there. And other major oil-producing countries like Venezuela, Russia and Indonesia, are not exactly trouble-free zones either. In 2004, domestic ethanol eliminated the need to import 144 million barrels of oil. That reduced the U.S. trade deficit by $5.1 billion.
4. High crop yields. The demand for ethanol has pushed up corn prices to over $3 a bushel, a boon to Wisconsin farmers – but costly to the state’s ethanol producers. “If not for ethanol plants,” says Bob Oleson, executive director of the Wisconsin Corn Growers Association, “Corn would be 50 to 60 cents a bushel cheaper, because there would be so much of it.” More farmers are planting corn (over a third of the state’s cropland is planted in corn), but ethanol eats up an increasing share of it.
5. Government subsidies.
In 2004, farm state lawmakers won an extension of the Federal tax break for ethanol. Originally set to expire in 2007, the deadline was extended to 2010.
Last year, Congress gave ethanol its biggest boost yet, requiring Exxon Mobil and other refiners to double their ethanol use by 2012. This gives ethanol distillers a guaranteed market for the first time.
The federal government subsidizes ethanol. The auto industry supports ethanol. Investors are clamoring for ethanol stocks. Public Opinion favors ethanol. Everybody likes ethanol (except maybe those few conservative talk show jocks who spout antiquated statistics about the amount of energy to grow the crop and convert it to ethanol as more costly than its worth).
Most Americans agree that ethanol has a future in our highway fuel system. Seldom will Republicans and Democrats, auto companies and investors and public opinion all fall on the same side of an issue.
Bush, whose campaign pledges to support ethanol helped him win seven of the 10 largest corn-growing states in the 2004 election, has made the biofuel a cornerstone of his energy policy.
In his State of the Union address in January, Bush said ethanol could free the U.S. from its costly dependence on foreign supplies.
That alone makes ethanol a winner.
Robert Grede is a Milwaukee-based consultant and author of “The 5 Kick-Ass Strategies (Every Business Needs),” published by SourceBooks. He serves as a consultant to an ethanol plant in Wisconsin.
