Is Ethanol Really A Viable Alternative Fuel?
The Dynamic Wealth Report
August 29, 2008
The Most Cruel And Vicious Scam . . .
About 4 years ago I was sitting in a big hotel ballroom. I was attending
an alternative energy conference in Washington DC. The movement to new
energy technology was just starting, and the conference was still small
in size. My job was to identify the most promising companies . . . and
meet with their CEOs.
It was here that I first met Matt Simmons.
He was one of a long line of speakers that day, but I remember him best.
He was giving a presentation on oil. He held up a cup of coffee saying
on a cup for cup basis, Americans were paying significantly more for
coffee than oil. His entire presentation was about the supply and demand
of oil. He explained why prices were set to increase further. He
discussed in detail the problem of peak oil, and why we were at the end
of easy oil.
When he gave his speech, oil was trading hands around $30 a barrel.
Matt had studied the major oil finds in Saudi Arabia. He analyzed old
reports and he scrounged for everything available. He even interviewed
old oil men who had worked the fields.
The result of his research was a book on his findings. He called the end
of easy oil. He called for peak oil and the eventual price increase. I
don’t think even he knew how right he’d be.
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Needless to say, when it comes to oil Matt knows his stuff.
That’s why I read with interest a recent interview he gave in Oil & Gas
Financial Journal.
I know I read some really strange stuff . . . but you never know where a
great idea is going to come from.
Anyway, they interviewed Matt and one of the topics was ethanol. I sat
up and took notice. Ethanol has been held up as a key alternative to oil
in the US. Unfortunately, I don’t think it’s the Holy Grail it’s made
out to be.
Matt apparently agrees. He had this to say about Ethanol:
“It is one of the most cruel and vicious scams you can imagine. It’s a
very energy-intensive product to create and what you end up with is a
very poor source of energy.”
Now those are fighting words if I ever heard them. But the scary part
is, he’s right.
Ethanol is a great product . . . if you live in Brazil. A significant
portion of their economy has transitioned over to ethanol. They grow
sugar cane, which is then processed into sugar. The sugar is fermented
to produce ethanol. And that ethanol powers a big portion of their
economy.
The problem in the US is a simple one. Sugar cane doesn’t grow all over
the US like it does in Brazil. So we need to use our biggest crop -
corn.
Corn however is used not only to feed humans, but also in the production
of meat. This creates an interesting trade-off. Food or Fuel?
Ethanol does have a place in America. But I believe it’s a small one.
Currently ethanol is used as an additive to gasoline. In that role it
helps keep our environment clean. But transitioning from oil to corn
based ethanol is not only stupid, it’s not practical.
The solution is cellulosic ethanol.
Ever hear of it? Cellulosic ethanol is still a few years away from wide
scale development . . . but not as far out as many people think.
Cellulosic ethanol is an ethanol production process which breaks down
the cellulose of a plant. The cellulose is converted into starches and
sugars. And these are eventually converted into ethanol.
It’s a complex process. I won’t bore you with the technical details.
This is why cellulosic ethanol is so important. The process could
convert wood chips into ethanol. It could convert corn stalks into
ethanol. Basically any plant matter could be turned into ethanol.
No-more “Food or Fuel” decision.
We could grow corn to eat, and use the stalk for powering our cars. Just
think of the potential.
There are many small companies working on different ways to
commercialize the cellulosic ethanol process. Unfortunately, not many
are worth a second look.
One company I like however is SunOpta (STKL). Strange I know. The
company is primarily focused on food products. They have a $500 million
market cap, and are expecting revenues to be around $1.0 billion. But
the interesting part of the company is their division focused on
cellulosic ethanol production.
They’ve been doing some really interesting stuff. In the course of full
disclosure, I worked on one of their financings a few years ago. You
might take a position in SunOpta. It’s an interesting way to play the
future of ethanol in America.
Editors Note: Monday is Labor Day and the markets are closed. The
Dynamic Wealth Report will return on Wednesday. From all
of us at Hyperion Financial Group, we wish you a happy and safe holiday.
• Cott (COT) was upgraded to “Neutral” by UBS. The company
manufactures non-alcoholic beverages.
• Coca-Cola (KO) was downgraded by Credit Suisse. The rising value of
the dollar might hurt Coca-Cola sales around the world.
• William Blair initiated coverage on MasterCard (MA) with an
“Outperform” rating. The analyst believes the company will do well from
increased international opportunities.
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