|
More
on Ethanol, Water, and Climate Change
Brian
Trumbore
President/Editor, StocksandNews.com
To wrap up our little series on alternative
energy, Laura Vanderkam authored a piece for the May/June
issue of The American, an admittedly conservative
publication. [I just feel obligated to offer that
in the interest of full disclosure.]
Titled
"Biofuels or Bio-Fools?" Vanderkam talks about Carlos
Riva, CEO of Celunol, a Cambridge, Mass., company
that is looking to convert cellulose into ethanol.
Celunol, like many other similar operations, has extensive
venture capital backing, in his case from the likes
of Braemer Energy Ventures, Rho Capital Partners,
Charles River Ventures, and Khosla Ventures. Khosla
is run by Vinod Khosla, one of the co-founders of
Sun Microsystems in 1982, and "the number-one proselytizer
of cellulosic ethanol, touting it as America's great
new fuel to anyone who will listen," according to
Vanderkam. "The last time there was this much venture
capital pumped into one industry, the dot-com bubble
inflated and burst."
As
I've noted in prior "Wall Street History" pieces,
as well as my "Week in Review" column, Congress passed
the Energy Policy Act in 2005 that required 7.5 billion
gallons of renewable fuels - mostly ethanol - to be
blended into gasoline per year by 2012. In his last
State of the Union Address, President Bush upped the
target to 35 billion gallons by 2017, or one-fourth
of the gasoline consumed in the U.S. in 2006 if the
mandate was met.
Laura
Vanderkam:
"But
many experts think that relying on corn alone to feed
a 35- billion-gallon market would be foolish and probably
impossible. First, while ethanol is perceived as a
clean fuel, the old corn conversion processes have
often been too dirty and inefficient for anyone to
take the claim of 'green' status seriously. Second,
meeting the target would consume the nation's entire
corn crop. In the cellulosic industry, says Riva,
'there's a general sense that grain can only achieve
between 12 to 15 billion gallons in this country because
of the impact on corn prices. As a nation, as a society,
we are going to be able to take as much cellulosic
ethanol as the nation can produce economically.'"
When
you look at the ethanol mandate of one-fourth of the
gasoline consumed just last year, Vanderkam notes
"In the early days of the Internet revolution, governments
stayed mostly out of the way of commerce. No bureaucrat
required that Americans do 25 percent of their shopping
online. By contrast, energy policy is more tied to
questions of national security, environmental benefits,
and agricultural politics."
In
the case of ethanol, it benefits in no small part
from a 51-cent- per-gallon-of-ethanol tax credit to
blenders that mix it with gasoline. But then the U.S.
also levies a tariff on imported ethanol that reduces
foreign competition.
Laura
Vanderkam's main point is, what happens if oil drops
back to $30 or $40 a barrel? The biofuels make no
economic sense at that point. So?the venture capitalists
have become experts at lobbying Washington for more
subsidies and penalties on oil and gas. These days,
of course, that means it's all about Big Corn. Vanderkam
adds the two ethanol factions - corn and cellulosic
(or old and new) - "are on a crash course."
Meanwhile,
the simple fact is growing corn itself isn't real
clean. "Manure trucked in and spread on cornfields
releases greenhouse gases. Bacteria in the manure
flood into nearby waterways, and chemical pesticides
slathered on the fields leach into the ground. Transporting
corn to the Midwest's giant ethanol plants involves
fossil-fuel-hungry trucks and trains."
Two
professors, Tad Patzek of Cal-Berkeley, and David
Pimentel of Cornell, quantified ethanol's efficiency
and both found it has a "negative energy balance."
In other words, "it takes more energy to produce a
gallon of ethanol than a gallon of ethanol can supply."
As Vanderkam notes, "Patzek said in a 2005 speech
that if drivers properly inflated their tires, that
would have a greater impact on U.S. energy security
than switching to ethanol would." Others vehemently
oppose the two professors.
And,
again, ethanol these days is about politics?like in
the case of Archer Daniels Midland Company, the giant
agricultural conglomerate with seven plants producing
ethanol in the Midwest; one-fifth of total production
at this point. In 2000, Sen. John McCain said ethanol
subsidies were a giveaway to companies like ADM. McCain
thus made a lot of enemies in Iowa. But today, while
he says he is still skeptical about ethanol subsidies,
"I support ethanol, and I think it is a vital alternative
energy source." Huh.
Of
course Big Corn gets the subsidies, and farmers who
buy feed corn for cattle, to cite one example, suffer
from higher costs when corn prices rise. Consumers
of corn then suffer as well. Which begs the ethical
question, as Vanderkam puts it, "In a world where
people starve, does it make sense to run cars on food?"
Then
again, ethanol producers would argue that Big Oil
doesn't exactly hold the moral high ground either.
For now, though, the battle is really between the
venture capitalists and biofuel entrepreneurs against
both oil and gas as well as the old corn ethanol plants.
Few believe oil will plummet back to the $30- $40
level and kill the fledgling industries.
---
On
a different yet vitally important topic, water, I
came across an interesting table from Roger Bate of
the American Enterprise Institute, who recently authored
the book "All the Water in the World."
The
table is about the use of water for agriculture vs.
agriculture as a percentage of GDP.
So,
for example, agriculture in the United States is 1.6%
of GDP, while agricultural water use as a percentage
of total water use is 41%. In Japan, agriculture is
1.5% of GDP and requires 62% of the total water. Germany,
though, uses up just 20% of its water for an agriculture
sector that equates to 1.2% of GDP.
But
in the poorer nations, such as in Africa, water use
for agriculture is between 90% and 98% of the total
water available; meaning that poor consumers often
pay as much as 100% more for the same water. [The
cost to find it, cart it, etc.] It's about water rights
and legal or implicit entitlements to the stuff.
Lastly,
there are these comments on water and global warming
from a column by Gregg Easterbrook in the April 2007
issue of The Atlantic.
"Whatever
happens to our oceans, climate change might also cause
economic turmoil by affecting freshwater supplies.
Today nearly all primary commodities, including petroleum,
appear in ample supply. Freshwater is an exception:
China is depleting aquifers at an alarming rate in
order to produce enough rice to feed itself, while
freshwater is scarce in much of the Middle East and
parts of Africa. Freshwater depletion is especially
worrisome in Egypt, Libya, and several Persian Gulf
states.
Greenhouse-effect
science is so uncertain that researchers have little
idea whether a warming world would experience more
or less precipitation. If it turns out that rain and
snow decline as the world warms, dwindling supplies
of drinking water and freshwater for agriculture may
be the next resource emergency. For investors this
would suggest a cautious view of the booms in China
and Dubai, as both places may soon face freshwater-
supply problems. [Cost-effective desalinization continues
to elude engineers.] On the other hand, where water
rights are available in these areas, grab them?.
"(The)
global agricultural system is perilously poised on
the assumption that growing conditions will continue
to be good in the breadbasket areas of the United
States, India, China, and South America. If rainfall
shifts away from those areas, there could be significant
human suffering for many, many years, even if, say
Siberian agriculture eventually replaces lost production
elsewhere. By reducing farm yield, rainfall changes
could also cause skyrocketing prices for commodity
crops, something the global economy has rarely observed
in the last 30 years."
Easterbrook
concludes on the broader topic of climate change in
general:
"Why,
ultimately, should nations act to control greenhouse
gases, rather than just letting climate turmoil happen
and seeing who profits? One reason is that the cost
of controls is likely to be much lower than the cost
of rebuilding the world. Coastal cities could be abandoned
and rebuilt inland, for instance, but improving energy
efficiency and reducing greenhouse-gas emissions in
order to starve off rising sea levels should be far
more cost-effective. Reforms that prevent major economic
and social disruption from climate change are likely
to be less expensive, across the board, than reacting
to the change. The history of antipollution programs
shows that it is always cheaper to prevent emissions
than to reverse any damage they cause."
---
Wall
Street History will return next week.
Brian
Trumbore
BUYandHOLD
does not recommend any securities. The security mentioned
above is being used for illustrative purposes only
and should not be regarded as an offer to sell or
as a solicitation of an offer to buy.
|
