ETHANOL ECONOMICS

Robert Rapier here dissects the ethanol question. To some this is old news but to anybody it is very sound economics and, therefore, worthy of consideration.

Among Rapier's observations:
-I strongly support sustainable alternatives, having done my graduate school research on cellulosic ethanol. But I do not consider grain ethanol a sustainable alternative...

-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.

-There are some fundamental differences between the U.S. and Brazil that explain Brazil’s energy independence. The first is that Brazil has a far lower per capita demand of energy than does the U.S...Brazil’s energy independence miracle was 10% ethanol and 90% domestic crude oil production. Brazil did not farm their way to energy independence...

-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...

There is also a discussion of Bill Gates' and Warren Buffet's positions on ethanol investing and a very specific discussion of investment in Pacific Ethanol.

ETHANOL INVESTING: COUNTERPOINT
by Robert Rapier
R-Squared Blogspot
June 23, 2006