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TMFBlacknGold (98.72)

The Myth of Alternative Fuels: As Told By an Alternative Fuels Maker

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November 11, 2010 – Comments (10) | RELATED TICKERS: PEIX , VRNM , BP

      It always irks me when I see articles about the wonders of ethanol from any means of production. What really pisses me off however, is that everyday investors get caught up in the conversation - or as I like to call it MYTH. Perhaps you have read articles or heard why ethanol isn't the godsend people claim it to be. But do you really know the facts behind it? Don't worry. As a bioprocess engineer student I would like to help my fellow investors by putting it quite simply: ethanol is a load of crap. Here's why...

1) ETHANOL YIELDS: Ethanol is only relevent because of the massive government subsidies that keep it alive. One acre of corn yields 342 gallons of ethanol, 263 of which is burned from seed to fuel. That's a net yield of 79 gallons! The US has 442,309,000 acres of arable land and imports 317,790,900,000 gallons of oil per year (2008 number). Doing some simple math the US could plant corn on every acre of farmland, convert it ALL to ethanol, and still only make 10% of its 2008 consumption needs. This would be a major step backwards given that the US currently imports only 60% of its crude oil. These facts and statistics come from the book Gusher of Lies and Department of Agriculture reports.

2) SUBSIDIES: Corn ethanol subsidies totaled $7.0 billion in 2006 for 4.9 billion gallons of ethanol. That's $1.45 per gallon of ethanol. Good thing, because producing a gallon of ethanol costs $2.24 compared to $0.63 for gasoline. Even with the subsidies producing ethanol costs 25% ($0.16/$0.63) more than gasoline! These facts and statistics come ultimately from Cornell University's David Pimentel. I added a little math.

3) LESS ENERGY: Ethanol only has 66.7% of the energy as a gallon of gasoline and produces twice (2x!) the amount of CO2. Combustion is quite simply: CxHx + O2 --> H2O + CO2. So, when the DOE ups the ethanol content in gasoline from 10% to 15% you are going to be paying more money for less miles and more pollution. Pretty sweet huh? These facts and statistics come from me, but don't worry, I passed all of my chemistry courses.

What are Fools to do? There are other negative effects of ethanol on society, but this is a blog not a book. Now I know what you are thinking, "BlacknGold, what about cellulosic ethanol?" Sure, it is more efficient in terms of yields (8x as much in some cases) and can be grown on land not labeled as arable, but it has its shortcomings too. Chemists claim we are just an enzyme away from breakthroughs, but in chemical engineering everything is an enzyme away.

If ethanol was so amazing, why did dozens of companies that pursued it go bankrupt or switch production away from it? The paper industry, which is desperate to make a buck, looked to produce ethanol from various byproducts. It quickly learned that it was A) not viable B) the least value-added product they could produce C) better off burning the byproducts. Ethanol will always be pursued, but I have a better investment strategy for Fools looking to capitalize on alternative fuels.

Rule #1. When researching a company, if you see the word bacteria or algae the company is already one million times better than an ethanol company. It has to do with efficiency and spacing. Still in its infancy, microbial systems that produce fuel out-compete ethanol. (When I searched butanol companies for links to show you, Google corrected me to "ethanol companies".) Butanol isn't as sexy as ethanol to politicians, but it should be something you are familiar with. It is cheap to produce (from Clostridium strains), contains 90% of the energy of a gallon of gasoline, is a drop in replacement to the current infastructure, can be mixed with gasoline in higher blends, won't ruin your car engine, and is supported by DuPont, BP, Braskem, and others. Go to the following link if you do nothing else:  www.nrel.gov/analysis/seminar/docs/ea_seminar_mar_11.ppt    Algae fuel companies are similarly intriguing although they play in the diesel court. Giants and innovation leaders such as Solazyme (http://www.solazyme.com/) and Sapphire Energy (http://www.sapphireenergy.com/) are showing the DOE that biodiesel from algae is fo real, fo sho.

Any questions or comments please feel free to ask. Also, my first Pharma Blog is coming out next week on BDSI, be sure to check it out!

        BlacknGold 

10 Comments – Post Your Own

#1) On November 12, 2010 at 11:41 AM, Goofyhoofy (< 20) wrote:

You may have valid arguments, but you make them like a 3rd grader fighting over a soccer ball.

Yes, the yields are low, but doing some "simple math" is silly. Nobody is talking about replacing ALL the country's farmland and trying to replace ALL the imports. This will not be a game of everything, it will be a game of incremental improvements. It's like the people who say "the wind doesn't blow all the time, so wind power is useless and we shouldn't bother at all." (insert "sunlight" for "wind" and "shine" for "blow" if you like.)

Many industries require subsidies to get started. Jet engines didn't come full blown from some inventor's garage, and the first satellites didn't get launched because XM thought it would be cool. We haven't given any subsidies to high speed rail. China, Japan, France and Germany have. How's that working out for building an American high speed rail industry? Not so much, eh?

The idea that ethanol must be a bad industry because so many companies went bankrupt is thin gruel. By that logic the internet must be a bad industry too. Heck, thousands of companies pursuing digital dreams have gone bust, that's hardly a barometer of anything, is it?

Incidentally, I have tried to persuade a friend of mine who is enamored with the ethanol industry to stay away; I don't happen to believe the time is right for investment - but I do believe it's a reasonable area for exploration and experimentation, even if it goes badly. Lewis & Clark may have discovered the Pacific Ocean, but they didn't profit from it at all, unless you count having their names in the history books as worth something.

Alexander Fleming discovered penicillin, but he didn't even know what he had. It took others, and years, and research investment and yes, subsidies to bring that miracle to market and change the world. And even so, it doesn't cure every infection ever known on the planet. Does your logic say we shouldn't have pursued it? 

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#2) On November 12, 2010 at 12:06 PM, BillyTG (29.39) wrote:

+1

BlacknGold, any thoughts on peak oil?

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#3) On November 12, 2010 at 12:41 PM, TMFBlacknGold (98.72) wrote:

Fellow Fool Goofyhoofy makes a valid point. It is not the intention of anyone to replace all of the country's gasoline with ethanol. I was not trying to make that argument. It is scary though that the percentage of farmland growing corn for ethanol production has grown from 15% several years ago to 25% today. The best point Goofy makes is that any infant technology can be spurred by subsidies. That is fact and cannot be argued.

However, that does not simply mean that every technology that starts out under 10 ft of water will ultimately become a winner with large amounts of money. I am simply making the argument that the science behind ethanol does not work. Sure we can grow it domestically, but why did we pursue a fuel with less energy content and more pollution per gallon than the fuel currently in place? Many digital tech companies went bankrupt, yes, but many also made it big. Can anyone name a big ethanol company?

There are many differences between how the US pursues alternative energy (and its capacity to) compared to other countries. Government structure, population, market structure, etc. It is not as black and white as people claim to be. Goofyhoofy, I can tell you are well-read, which is respectable in my book given most people's lack of intellect. Ethanol will most likely be a PIECE of the future of fuel, but I believe the industry will shift towards better alternatives such as butanol and algal diesel.

BTW, once upon a time penicillin DID cure just about everything. But our overuse of antibiotics (over 21 classes exist today), has led to bacterial mutations and resistant strains. That happens to be one of my areas of expertise. Alexander certainly knew what he had. He had been doing research on antiseptics since WWI.

Comments are welcome. BlacknGold

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#4) On November 12, 2010 at 1:04 PM, chk999 (99.97) wrote:

BlacknGold - well done blog! Write more about the processes and chemistry of alternate fuels. We need to know these things.

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#5) On November 12, 2010 at 8:13 PM, gman444 (29.05) wrote:

+1.  How about what Brazil is doing with sugar cane?

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#6) On November 12, 2010 at 8:58 PM, TMFBlacknGold (98.72) wrote:

Brazil is an intriguing but, and as I eluded above, complicated situation. The facts are most likely skewed by politicians and advocates of sugarcane ethanol, however. It should be noted that the US is second to only Brazil in ethanol production.

Ethanol in Brazil is blended with gasoline in a 3:1 ratio or E25 (25% of every gallon is ethanol). I was actually surprised as I thought the number would be higher. Brazil is blessed with fertile land and easily accessible fertilizer imports from Chile (rainforest was clear-cut to increase farmland, a negative effect on society to consider). Its population is about 100 million less than that of the US, yet ethanol accounts for only 17.6% of transportation fuel. Also, large sections of Brazil are off limits to roads and highways due to their large tracts of forests. It will be interesting to see how sugarcane ethanol keeps up with a growing population. 

Lets not forget that Brazil has been developing ethanol for over 30 years, so we are light years behind. Goofyhoofy would be happy to know that sugarcane ethanol would not be possible without massive government subsidies and a full national committment. [Luckily for Brazil, one of the largest oil reserves was found off their coast in recent years. One word: Petrobras (PZE?)]

Cars in Brazil are required to be Flex-Fuel. You may have seen these decals on the back of large SUVs and trucks here in the US. Unfortunately, they aren't necessary in the US because fuel blends aren't that high yet. Regardless of the facts auto companies are allowed to include the potential MPG improvements in their fleets - even if a drop of ethanol blend never touches the engine.

As I said and cannot say enough - it is a complicated issue. Thank you for the recs and recognition. If you are interested in the issue please feel free to comment. I would also recommend the book Gusher of Lies.

BillyTG I will write-up my thoughts on peak oil. I just want to make sure I dedicate sufficient time for this integral part of alternative fuel conversation.    BlacknGold

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#7) On November 13, 2010 at 2:26 AM, gman444 (29.05) wrote:

Very interesting post, BlacknGold.  I've been under the impression that making ethanol from sugar cane actually makes sense, as opposed to corn.  Have I been wrong about this--is there an appreciable difference re: the problems you originally mention in this post?

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#8) On November 13, 2010 at 4:22 PM, TMFBlacknGold (98.72) wrote:

gman44 - Sugarcane ethanol made sense for Brazil. Don't forget where Brazil sits on the globe. They could afford to dedicate millions of acres of farmland to sugarcane production without any major disruptions to their food supply. Also, paying farmers to grow sugarcane for ethanol spurred economic development over the last several decades and created a middle class. There is still a large population under the poverty level, but futher sugarcane ethanol production won't help it. In fact, many large corporations have bought individual farmers out, so the economic growth is almost irrelevent as fewer people are involved. The US subsidies for corn ethanol aren't the difference between Farmer Joe feeding his family tonight or not. That was the case in Brazil not so long ago.

Sugarcane ethanol production is 6x cheaper and more efficient than ethanol from corn. Even so, the government has to provide subsidies to make it cheaper than gasoline. This is mainly due to the advanced infastructure in place and some better cultivation methods. All of the byproducts from sugarcane ethanol are used somewhere in the process. No waste is as close to engineering perfection as one can get. To summarize my sources, I found an interesting overview written by a professor at the University of Sao Paulo http://cornellsun.com/node/41208. You can see that sugarcane ethanol has many negative impacts on the environment.

Also, I read a few sources advocating ethanol as a cleaner fuel because it contains more oxygen and therefore pollutes less. This could not be a bigger lie. The extra oxygen combines with nitrogen in the air and creates many NOx compounds, aka ground level ozone. If you think CO2 is bad, NOx might as well be the black death. Do some quick research before someone tries to confuse you with chemistry.

BlacknGold

 

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#9) On November 13, 2010 at 4:58 PM, gman444 (29.05) wrote:

Interesting indeed, BlacknGold, and more complex than I realized.  It seems clear that on balance, sugarcane ethanol has been good for Brazil--I too was surprised that they only use a 25% mix of ethanol/gasoline.  But the "ground level ozone" and pollution caused by vinasse are troubling.  I've been a critic of corn ethanol in the US because of the problems you mention, as well as the fact that it takes food away from people or livestock.  Thanks for the blog and the link. 

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#10) On March 18, 2011 at 4:12 PM, mhy729 (30.09) wrote:

Old news, but I see that Monsanto has now entered into a collaboration with Sapphire Energy.  Unfortunately for us small time investors, Sapphire and Solazyme are privately held.  Best of luck to them though...this algal stuff sounds like a real game changer, just not yet.

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