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Ethanol is coming more to the forefront in financial news, not so much for its potential as a renewable fuel source but more with respect to ethanol's future as a capital investment opportunity. In recent months the small cap ethanol industry, in the range of $100 million to $1 billion, has undergone a major devaluation in share value off its 52-week high.
The small cap stocks selected from across the board on November 23 are: Aventine Renewable Energy Holdings Inc. (AVR); Green Plains Renewable Energy (GPRE); MGP Ingredients (MGPI); Pacific Ethanol (PEIX); The Andersons Inc. (ANDE) and VeraSun Energy (VSE). Losses in share value range from 58% to 87.7%, averaging 70%. The price of ethanol has dropped from $4 per gallon in 2006 to $1.50 in 2007. This is a far cry from early 2007 when ethanol looked like the dream investment of the future. However, there were skeptics in the marketplace who began issuing warnings earlier in the year. One such person was Jim Cramer, CNBC host of "Mad Money," who was quoted on the website seekingalpha.com, June 19, in an article by Andy So entitled "An Ethanol Stock Watchlist (ADM, VSE, PEIX, MGPI, ANDE).” Cramer wrote: "Ethanol is in the last stage of a speculative fad's life cycle. I know this because we see it all the time in these hot sectors. We saw it with the dot-coms in 1999, with the power merchants in 2000, with the oil service names last year and into this year and with solar power. Now ethanol is following the same pattern." Author So followed Jim Cramer's quote with his own opinion: "I believe there are differences between ethanol's speculative frenzy and that of the dot-com days that Jim Cramer draws a comparison with. Ethanol is a commodity much like gold…." This is where ethanol stands today. The coming years will reveal the true value of ethanol and its rightful place in the list of alternative energy sources from which the United States has to choose. Many of the dot-com companies of the year 1999 are viable today and some have become large cap industries worth billions-plus. The infrastructure of ethanol is intact and fairly substantial. There are 131 operating plants across the nation, producing 7 billion gallons per year with an additional 72 ethanol plants under construction that will double the capacity. Many new ethanol plants have extended their construction schedules to 24 months. Existing plants have postponed expansion plans altogether. Ethanol is currently blended into 46% of lead-free gasoline as E10 (10% ethanol and 90% gasoline) and amounts to 3.5% of total annual U.S. gasoline consumption. E10 can be used in any standard U.S. vehicle. E85 (85% ethanol and 15% lead-free gasoline) has very limited use, inasmuch as a specially adapted automobile engine must be used. Only 1,300 gas stations are equipped to pump E85, mostly in the Midwest. There is still an ongoing debate as to ratios of efficiency between ethanol and gasoline. The U.S. Department of Energy (DOE) Energy Efficiency and Renewable Energy Biomass Program study concluded that the "net energy balance" of making fuel ethanol from corn grain is 1.34 – that is, for every unit of energy that goes into growing corn and turning it into ethanol we get back about one-third more energy as automobile fuel. Professor David Plimentel of Cornell University takes exception to the DOE figures. The DOE report takes the professor’s study into consideration and states that Professor Plimentel is claiming that it takes substantially more energy to grow corn and make ethanol from it than the energy received. From a cost standpoint, both are wrong — on any given day or week or month, both the price of oil and the price of corn can vary substantially. Add to this the fact that for every gallon of ethanol that goes into your tank you, as a taxpayer, already have paid a 51-cents-per-gallon subsidy to the oil companies for blending ethanol with their gasoline. Increased pollution is a major factor in the production of ethanol. National Geographic’s October 2007 issue explains in an article entitled “Green Dreams!” how additional CO2 is created in the production of ethanol: “The process gives off large amounts of carbon dioxide… Some studies … suggest that ethanol is a loser’s game, requiring more carbon-dioxide fossil fuel than it displaces. Others give it a slight advantage. But however the accounting is done, corn ethanol is no greenhouse panacea.” Biofuels constitute one other example of the uncanny ability to deny reality of the Congress and of the public. While Congress and the U.S. population chase energy rainbows, reality dictates that the immediate solution to America’s critical energy problem is domestic petroleum, of which there is an abundance. Congress, the U.S. taxpayer and the investing public are spending billions of dollars pursuing energy phantoms. A small portion of the U.S. dollars lost in the latest hi-tech ethanol sell-off would have built multiples of border fences across the Mexican Border, solving the most serious problem the United States faces next to energy itself. It’s time America accepts reality for what it is! E. Ralph Hostetter, a prominent businessman and publisher, also is an award-winning columnist and Vice Chairman of the Free Congress Foundation Board of Directors.
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