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.
7 comments:
interesting article. Never knew about this ethanol thing going on. True it is scary but to me, it becomes a lot scarier if I think what if a poor country like India tries to follow suit.
if water lavel falls in earth due to ethanol process ..it may cause drastic effects which oil already did (like wars/poverty) ...i think sun is the best source of energy .. but noone have patience 2 use it
i too believe...that in the long term sun has to be a major source of our energy requirements...ethanol might be too expenesive a form of energy...
India has also started on the ethanol road...but fortunately as of now it is produced only from the molasses generated during sugar production process...corn/wheat or grain based ethanol in india would probably not be politically feasible in this era of tight food grain supply and corresponding inflation...but if india is forced to import as i think it would be...than there is a problem..
there is one more interesting twist to this ethanol story...US projects it as a way to independence from middle east oil....the increased ethanol is possible only because of increased acreage of corn....this increase comes at the cost of soya...corn, of course, consumes nitrogen which soya doesnt..so we require more urea...this commodity is very thinly traded in the international markets and guess who has that extra little bit of urea to be exported...countries in the ME of course!!!!
China apparently is trying to slow down its ethanol march due to water issues....in fact even Coal-to-liquid drive may slowdown given the water intensity of these processes. Water is clearly renewable only to an extent...over exploitation will make it surely make it non-renewable...any renewable-energy program which takes too much water is by itself non-renewable...!!!
ethanol producers across the world are struggling to make money...corn prices dont allow them to....
also have a look at this piece from FT....
Ethanol planning gets stuck in the pipeline
By Sheila McNulty in Houston
Published: August 8 2007 22:00 | Last updated: August 8 2007 22:00
As dozens of companies rush to build plants to produce government-mandated ethanol, Karl Miller, chairman and chief executive officer of MMC Energy, is staying out of the way.
One of his bankers asked him when MMC - an energy management company that acquires and actively manages power-generation assets in the US - was going to jump into the fray and do a renewables deal. “When we can make money off it,” was his response.
He does not believe the time has come for ethanol. Certainly plenty of people are profiting from selling the shares of ethanol producers but not many are doing so from selling the fuel itself, he says: ”Nobody has thought out the whole value chain.”
Ethanol is dependent upon trucks and trains to deliver it to market. And yet the US transport system, Mr Miller says, is old and overloaded and will become more so when many of the new coal facilities under construction come online.
”Somebody better work on getting from A to Z, because they haven’t figured it out yet,” Mr Miller says.
The natural solution would be to pipe ethanol around the country but that cannot be done through the current pipeline infrastructure set up to transport hydrocarbons, as water tends to build up in them, and it would attach itself to the ethanol, watering it down and rendering it useless as fuel.
Neil Koehler, chief executive officer of Pacific Ethanol, which produces and sells alternative fuels and their byproducts, does not want to use existing pipelines, anyway: “We have a pipeline system in this country that is decaying and overextended.”
He believes the use of trucks and trains provides diversity in logistics. And while a dedicated ethanol pipeline could be built, he thinks it unnecessary, arguing that ethanol is transported quite efficiently by road and rail.
“We have more practical things to do,” Mr Koehler says. One of those is to build a “virtual pipeline’’ by constructing new ethanol plants so they are able to load finished product directly into dedicated express ethanol trains that come right into the facility.
“The whole pipeline notion is much longer-term,” Mr Koehler says. And while some may well point to talk of one being built in Brazil, he notes that even that is still only on the drawing board.
That does not mean it cannot come off paper. Indeed, the Department of Agricultural Economics at Kansas State University published a paper entitled Pipeline Considerations for Ethanol.
It notes that Williams Energy Services reported it had successfully run tests where ethanol was transported through a pipeline but added that a successful pipeline would need to spend large amounts on ethanol-specific technology.
All this would take considerable investment: “Building a dedicated ethanol pipeline system from the Midwest to the coasts over such along distances would be prohibitively expensive.”
Environmentalists are, nonetheless, eager for such a pipeline to establish a system for when cellulose ethanol will, it is hoped, be developed. Until then, the problem will be finding investors to build it.
Mr Miller, for one, will not be putting his company’s money into such a project. He is, however, considering investing in the pressurised vessel tanks used to process ethanol.
Even though a first-class logistical system has not been put in place, many investors are lining up to produce ethanol, and they will all need the vessel tanks to do so.
He likens ethanol production to the mining industry. “We want to sell pickaxes to the miners, not own the mine,’’ Mr Miller says. “We want to buy the mine when they fail or go bankrupt.”
UN food boss urges biofuels rethink
By Javier Blas in London
Published: August 14 2007 17:42 | Last updated: August 14 2007 17:42
The world risks deeper poverty and greater environmental damage unless it fundamentally changes its bioenergy strategy, the United Nations’ top food and agriculture official has warned.
The UN Food and Agriculture Organisation is pushing for a high-level meeting next June to lay down rules for the international bioenergy market.
At present, the bioenergy industry is regulated by domestic policies rather than international agreement.
The FAO is urging the European Union and the US to lower trade barriers against ethanol imports; establish a system for bioenergy environmental standards; and provide more microcredit to farmers in developing countries to develop local biofuels.
Writing in today’s Financial Times, Jacques Diouf, FAO director general, said: “Such measures would allow developing countries – which generally have ecosystems and climates more suited to biomass production than industrialised nations and often have ample reserves of land and labour – to use their comparative advantage.”
Mr Diouf said the objective of the proposed meeting should be to ensure that bioenergy realised its potential to fuel sustainable growth and reduce hunger.
The US, Europe and Brazil last year accounted for almost 95 per cent of the world’s biofuel production. Canada, China and India produced most of the rest, according to the International Energy Agency, the industrialised countries’ energy watchdog.
Biofuel production, mostly of corn-derived ethanol in the US and rapeseed-derived biodiesel in Europe, doubled between 2000 and 2005, according to the IEA. In 2005, however, that was still just 1 per cent of global road-transport fuel.
The energy watchdog forecast that would rise to 4 per cent by 2030.
Mr Diouf said the bioenergy sector had a “huge potential to reduce hunger and poverty” if production shifted from rich to poor countries.
At the moment, rich countries’ tariffs make it uneconomic for poor countries to grow biofuel crops.
The problem for developing countries is exacerbated by food prices being pushed up by the biofuel industry’s rising consumption of crops.
Corn prices this year reached an 11-year high of $4.30 a bushel while wheat prices last week rose to $6.96 a bushel, the highest since 1996.
The US biofuel industry last year consumed about 20 per cent of the country’s corn crop, far more than in the past.
“It is clear that the current practice of relying on food crops to produce fuel will be relatively short-lived,” Mr Diouf said.
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