Ethanol - Are we heading towards another big investment bust??

Peak oil theory says that we are running out of oil.Half of the geologists agree with it, the other half, of course, do not. I am not a geologist but that doesnt stop me from having an opinion. I dont know if it is according to the peak oil theory but i believe in the concept of increasing scarcity of oil simply on the basis that we cannot be exploiting the earth endlessly. It might look like a philosophical call but it is not without reasons.US, UK and Russia have peaked out in their oil production, according to production figures.We have not had a major oil discovery in the last 3 decades and every year the gap between the oil found anf the oil produced is increasing in favour of oil being produced. Which means we have not been able to replen ish our reserves of known oil. Moreover any new oil find takes anything more than 3-4 years before it reaches the market. the only major discovery of oil was in Kazakhstan about 3years back but that too will not reach market before 2011. the project cost has also doubled in the meanwhile. So not only is oil becoming difficult to find, but is also more and more expensive. In short, we as a world are unsure about the fate of oil, to say the least.

So we come to ethanol - the magic fuel the whole world has gone crazy about. US and Brazil are leading the way.US is employing the biggest corn crop in the world and Brazil the biggest sugar cane crop.Ethanol has amde countries to believe that it can reduce their dependence on Middle East oil. That it is a panacea for a good part of their energy problems. But....is it really that??

Lets see if there is something more to it.

About 60% percent of global ethanol comes from sugarcane and the other part comes from grains, majorly corn.

It takes 1000 litres of water, edible water at that, to process one tonne of sugarcane.Sugarcane by itself is a water intensive. So the process of making ethanol through sugarcane is going to be water intensive.
Then comes the process of making ethanol from corn.Every litre of ethanol requires 2.5 - 3 kgs of corn.The it requires 4-4.5 litres of water. Natural gas or some other form of energy is also put in.In effect we are putting wheat/corn/grain and water into our automobiles and none of these were ever used for automotive purpooses before.
The production of ethanol is scaling up big time. In 2005, it was estimated at 12 bn gallons. And it is again estimated to go up 2-3 times in the next 5-7 years, as continents and not just countries get hooked onto the band wagon.
Imagine the amount of water that is going into a process that never before consumed water, and similar is the case for grains.

The effects are already visible.US is starting to use an increasing amount of its corn in ethanol production.So are China and other countries.Corn prices are already at their ten year highs.And with more capacity coming up, the prospects for corn are bullish, to say the least. US and China are the biggest producers of corn and their exports have started coming down drastically. China's exports are expected to go down by about 45% this year. This is going to have a huge effect on the agricultural markets as a whole because the enhanced demand for corn is going to have reciprocating effects on other agri commodities.
This is very similar to what has happened in the biodiesel market. The demand for palm oil has caused the price of even coconut oil to go up.Increasing prices of agri products make them all the more less affordable for the poor as we go on putting their food into vehicles.

The water intensity of the whole process is scary in a scenario where we are increasingly struggling to meet the basic human demands for water. I have already given my views on water shortage in the previous article and would not deliberate further on it here. But in short, it is scary.

Ethanol, to me, is at the crux of this food-fuel war and the effects seem to be disastrous. I think this is one of the biggest mis-allocations of resources of every kind. Capital, agriculture or water.
Ethanol might turn out to be a big fraud on humanity.

WW - World War or Water War??!!!!

Did you know

- that more than a billion people have no access to safe drinking water?? (if that doesnt hit you then this will - every sixth human being doesnt have access to safe drinking water - imagine the whole of India not having water!!!)
- than in India only 30% of total cultivated land is irrigated??
- that India has only 4% of world's fresh water resources to support 16% of world's population???
- that by 2050 it is expected that Tibet plateau is expected to lose one third of its glaciers??...(remember is a big source of rivers for China and India!!)
- that some of the biggest lakes in the world like Victoria in Africa or Qinghai in China are shrinking or getting contaminated beyond repair??
- that demand for fresh water has tripled over the last 5 decades!!!

We can go on and on and on about this...the numbers are scary to say the least.Not oil, not copper, not zinc and not any other commodity, but water will probably lead to a lot of strife in the world.

Its not India alone. China, USA...well pretty much across the globe with no exceptions at all.Major rivers,including Nile in Egypt, Ganges in India, Yellow river in China, across the world are carrying lesser and lesser water.Fisheries have getting depleted at an alarming rate because the sea water is turning too salty for them as rivers increasingly fail to unload water into the oceans.
More and more water is now being diverted from irrigation to the growing urban population, leading to two consequences. One being the lower productivity of the land and secondly, disenchantment with agriculture as an economic activity since returns are too low to sustain living. Global warming is not helping the water cause with erratic and at times, extreme in nature, kind of rainfall.

In the increasingly tricky global geopolitical scenario, water will add a dimension like none other.The fight for water has the potential to escalate to a scale never seen in the history of mankind.

Can you imagine:
- China choking off Brahmaputra before it reaches India??
- Higher security around Lake Superior than around the White House??

Dont know if these are just hallucinations or the upcoming reality? But as an investor, optimism has to be in your DNA.

So how about large scale desalination plants doting the landscape across all the beaches in the world!!!!hmmmmmmm..........