ETHANOL INVESTING: COUNTERPOINT
from Financial Sense University
by Robert Rapier
R-Squared Blogspot
June 23, 2006
Excerpts:
There is certainly no point in putting E85 pumps across the country, because the U.S. can’t make enough ethanol to justify them. Even as grain ethanol production scales up, it will displace less than 2% of U.S. oil imports. The reduction in fossil fuel usage is also next to nothing, because ethanol production is heavily dependent on fossil fuels. Likewise, this means greenhouse gas emissions are reduced by a very modest amount. The Department of Energy recently concluded that E85, the 85% ethanol blend, would reduce greenhouse gas emissions by a mere 4%. That’s because ethanol is primarily a recycled fossil fuel, with a very small portion of renewable energy thrown in.
Ethanol Investing
Some investors have certainly made money with ethanol stocks. Investors once made money on dot-coms as well. Making money is no indication that the underlying fundamentals are good. Some of those dot-coms still exist today, but many of them had unworkable business models and went bankrupt. I will argue that some ethanol companies are in the same boat.
The U.S. Department of Energy last year commissioned a study on mitigating the effects of a peak in worldwide oil production. This report, commonly referred to as The Hirsch Report (
www.netl.doe.gov/publications/others/pdf/Oil_Peaking_NETL.pdf), had the following to say about ethanol:
“The market for ethanol derived from biomass is influenced by federal requirements and facilitated by generous federal and state tax subsidies.”
And:
“Ethanol from biomass is currently utilized in the transportation market, not because it is competitive, but because it is mandated and highly subsidized.”
See full article: http://www.financialsense.com/fsu/editorials/rapier/2006/0623.html
