Ethanol as an investment

In his most recent State of the Union address, President Bush argued that America "needs to diversify our nation's energy supply." One possible alternative fuel source is ethanol, primarily made from corn in the U.S. In 2005 Congress passed an energy bill that mandates 4 billion gallons of ethanol were to be blended into the nation's fuel supply in 2006, increasing to 7.5 billion gallons by 2012. President Bush wants to increase that amount to 35 billion gallons by 2017. On the face of it, this law sounds like a good deal for ethanol producers as it creates a sustained, guaranteed demand for the product that would justify infrastructure expenditures necessary in both production and distribution.

Unfortunately, ethanol as an investment presents a number of problems. U.S. ethanol is manufactured from corn which is primarily grown in the Midwest. But the processing plants and end-users are primarily on both U.S. coasts. Due to its unique chemical properties, ethanol cannot be shipped via pipeline as can oil, natural gas and gasoline. To get ethanol from its point of origin to its point of use requires shipping by railroads, which are already running at close to capacity. Ethanol shipments in 2007 are forecast to top 140,000 tank cars, each tanker carrying 30,000 gallons. Shipping by rail also requires ethanol growers to build rail facilities -- a prohibitively expensive undertaking. Barge shipment is too slow and many ethanol processing plants are not located on bodies of water. Shipment by truck is not cost-effective.

Even if the distribution problems could be mitigated, where is all this ethanol to come from? Current demand for ethanol already outstrips US production. 21.5 billion bushels of U.S. corn will be used to make ethanol in 2007, producing approximately 4.9 billion gallons. This is not nearly enough to satisfy demand. Consumption of ethanol already stands at 5.5 billion gallons. The U.S. is on-track on import more than 418 million gallons of sugar-derived ethanol from Brazil in 2007, despite the fact that imported ethanol carries a 54 cent-a-gallon tariff. Arguing that the U.S. switch to ethanol does not solve the problem of dependency on foreign energy sources. It merely changes the dependency from Saudi Arabia to Brazil, with China being the third largest ethanol exporter to the U.S.