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.