Biodiesel and Ethanol Biodiesel and Ethanol: Life after Oil, Part II
by Eric J. Fry
The Rude Awakening
Wall Street, New York
Tuesday, March 14, 2006 Eric Fry gets some mail on Biodiesel and Ethanol, and discusses them. ------------------------- Finally, the third Group Rude Research Project is in
full swing...what did you have to say? Two sides of the ethanol debate and the concept of an
"energy drain," A few tickers to keep an eye on, all the market data
and plenty more...
------------------------- Eric Fry, reporting from atop the deflating real estate of
Westchester County, New York... We asked, you responded... A few days ago, we kicked off the third-ever "Rude
Awakening Group Research Project" by asking all "Rude"
readers worldwide to divulge their favorite alternative
energy stocks. We received a broad range of excellent responses,
highlighting investment opportunities in a variety of
alternative energy industries. (We will be revealing many
of these ideas over the next few days). But we also
received a number of emails warning against naïvely
optimistic expectations for ethanol. "Fact about ethanol - it takes more energy to produce a
gallon of ethanol than the gallon of ethanol contains,"
explains David Bigelow of Kamuela, Hawaii. "This assumes
that the crop (corn, sugar, etc) it is produced from is
grown using farm machinery rather than human labor. There
may be a net energy gain in third world countries where
sugar cane is produced using mostly human labor. Also, a
gallon of ethanol contains only 72% of the energy of a
gallon of gasoline." Several other Rude readers issued similar warnings, all of
which we found to be quite instructive. Thus, before
launching into the opportunities, we'll share a few words
of caution, courtesy of the Rude readership...
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-------------------------
Life After Oil
Edited Eric J. Fry
"Hey Guy: A word to the wise," writes a reader who
identifies himself as Curmudgeon, "most Bio fuels are
energy sinks. In short they take more energy to make than
they are worth. EXAMPLE---Corn is used to make
alcohol...First you use a lot of fertilizer to grow it,
after using fuel to plant and then harvest it...Why then do
we make alcohol – because people like Archer Daniels
Midland receives billions and billions every year to do so
– politics again. Use the alcohol properly – DRINK
IT!!!!!!!!!!!!!" Expanding upon Curmudgeon's theme, another reader writes,
"Hi, my name is Pat Cross and I am a Mechanical/Electrical
Engineer, with an MBA, working in the Detroit automotive
industry. Here are my thoughts on ethanol and bio diesel: "I want to warn you and your colleagues about the economic
viability of the ethanol production from grains. In the
early 1980's my former employer (an auto company) conducted
extensive research on ethanol, and concluded that ethanol
production is an "energy drain". This means it takes more
energy to produce the ethanol than the ethanol produces.
Once you factor in fertilizing, planting, harvesting, and
transportation of the grains, and then add the energy
consumed in the processing of the grains to fuel, and
transporting that fuel to market, you have a net loss of
energy. (This net loss of energy means the ethanol
production will not be long term commercially viable as a
means of producing fuel. Its current pseudo short term
economic viability is a result of the ethanol being used as
a part of the mandatory blending process to make unleaded
gasoline cleaner)... "Although I have not studied sugar ethanol production, if
what I read...is correct, simple math shows sugar ethanol
can not be an energy gain. I read that it takes 1.2 tons of
sugar to produce the energy equivalent of a barrel of oil.
This is 2400 lbs. Simply dividing $60.00 oil by 2400 lbs
means sugar must be less then $.025 per pound for sugar
ethanol to break even. This does not even take into account
the processing costs of the sugar to ethanol. Even at
$100.00 oil, sugar would need to be less then 4.1 cents per
pound to have a chance of being economically viable. I do
not know the sugar processing business, but the local
plants here use a lot of energy to convert sugar beets to
sugar. (Their stacks resemble power plants while sugar
production is going on). You have to ask yourself, 'Can
sugar be produced at less than 4 cents per pound with
energy costing of $100 /bbl?' I suspect not. Sign Up for The Rude Awakening Start your mornings off with a dose of Rude news. The Rude Awakening is dedicated to highlighting phenomena in the financial markets that others may not see. Let the Wall Street Journal and the New York Times "break news." Sign up FREE Today! We will not share your email address with anyone else, period.
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Biodiesel and Ethanol: The Potential of Biodiesel "Bio diesel, if done correctly has potential to be a net
energy gain. In my opinion, bio diesel must be made from
'scrap' or 'waste' materials for the production to be
profitable. I cannot imagine that the energy used in
raising turkeys and converting them to fuel, for example,
would be less than the energy contained in the bio diesel.
However, utilizing organic waste, manures, trash, scrap
oil, used cooking oils, animal fat from slaughter houses,
etc. to produce the fuel would have potential. I think
getting a cheap source of the fuel (like waste materials)
and having the process efficient so the net energy gained
would be more than the net energy consumed is the key in
evaluating long term economic viability of the alternative
fuel. Blending bio diesel with diesel would be a method to
"standardize" the grades, making the end product more
marketable. "There is a possibility that ethanol from garbage and other
wastes may be an energy gain. I would say that it could
only occur where the garbage would not need to be shipped
far, and would have to see some type of feasibility study
to confirm that production could occur as an energy gain... "I know I have not suggested any hot alternative energy
stocks. Hopefully, you can use this information to
carefully evaluate potential companies others suggest. I
see a lot of companies going down the wrong path. Please
remember, 'The energy produced must be greater than the
total energy consumed in the entire process' for any
alternative energy program to have a chance of long term
feasibility, and reducing our reliance on oil." 
Biodiesel and Ethanol: Ethanol Investment Prospects Despite ethanol's energy-inefficiency, however, we would
not be quick to dismiss its investment prospects. Ethanol
production seems likely to remain on a growth path for many
more years. Therefore, for those investors inclined to
consider direct plays on ethanol production, reader Patrick
Lim suggests Pacific Ethanol, Inc. (NASDAQ: PEIX). "Pacific Ethanol engages in the development, production,
and marketing of renewable fuels in the western United
States," Kim writes. "Pacific Ethanol is constructing an
ethanol production facility in Madera County, California,
as well as developing four additional plants on the West
Coast. Kinergy Marketing, LLC, the company's wholly owned
subsidiary, is a West Coast based marketer of ethanol. In
addition, the company engages in the identification and
development of other renewable fuel technologies, such as
cellulose-based ethanol production and bio-diesel. Pacific
Ethanol was founded in 2003 and is based in Fresno,
California. Market Cap (intraday) - $550 million."
Pacific Ethanol seems a fascinating, if somewhat
speculative enterprise. We would note, for example, that
the company has only turned a profit in one year out of the
last seven. Perhaps it will reverse that ratio over the
next seven years, perhaps not. In either case, we would
remind all readers to conduct their own due diligence
before acting on any of the ideas that the "Group Research
Project" produces. These ideas are meant to "BEGIN" the
research process, not to complete it. Throughout the rest of this week, we will be bringing you
many more reader recommendations...So be sure to tune in
tomorrow.
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