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Wall Street History
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06/01/2007
More on Ethanol, Water, and Climate Change
To wrap up our little series on alternative energy, Laura Vanderkam authored a piece for the May/June issue of The American, an admittedly conservative publication. [I just feel obligated to offer that in the interest of full disclosure.]
Titled “Biofuels or Bio-Fools?” Vanderkam talks about Carlos Riva, CEO of Celunol, a Cambridge, Mass., company that is looking to convert cellulose into ethanol. Celunol, like many other similar operations, has extensive venture capital backing, in his case from the likes of Braemer Energy Ventures, Rho Capital Partners, Charles River Ventures, and Khosla Ventures. Khosla is run by Vinod Khosla, one of the co-founders of Sun Microsystems in 1982, and “the number-one proselytizer of cellulosic ethanol, touting it as America’s great new fuel to anyone who will listen,” according to Vanderkam. “The last time there was this much venture capital pumped into one industry, the dot-com bubble inflated and burst.”
As I’ve noted in prior “Wall Street History” pieces, as well as my “Week in Review” column, Congress passed the Energy Policy Act in 2005 that required 7.5 billion gallons of renewable fuels – mostly ethanol – to be blended into gasoline per year by 2012. In his last State of the Union Address, President Bush upped the target to 35 billion gallons by 2017, or one-fourth of the gasoline consumed in the U.S. in 2006 if the mandate was met.
Laura Vanderkam:
“But many experts think that relying on corn alone to feed a 35- billion-gallon market would be foolish and probably impossible. First, while ethanol is perceived as a clean fuel, the old corn conversion processes have often been too dirty and inefficient for anyone to take the claim of ‘green’ status seriously. Second, meeting the target would consume the nation’s entire corn crop. In the cellulosic industry, says Riva, ‘there’s a general sense that grain can only achieve between 12 to 15 billion gallons in this country because of the impact on corn prices. As a nation, as a society, we are going to be able to take as much cellulosic ethanol as the nation can produce economically.’”
When you look at the ethanol mandate of one-fourth of the gasoline consumed just last year, Vanderkam notes “In the early days of the Internet revolution, governments stayed mostly out of the way of commerce. No bureaucrat required that Americans do 25 percent of their shopping online. By contrast, energy policy is more tied to questions of national security, environmental benefits, and agricultural politics.”
In the case of ethanol, it benefits in no small part from a 51-cent- per-gallon-of-ethanol tax credit to blenders that mix it with gasoline. But then the U.S. also levies a tariff on imported ethanol that reduces foreign competition.
Laura Vanderkam’s main point is, what happens if oil drops back to $30 or $40 a barrel? The biofuels make no economic sense at that point. So the venture capitalists have become experts at lobbying Washington for more subsidies and penalties on oil and gas. These days, of course, that means it’s all about Big Corn. Vanderkam adds the two ethanol factions – corn and cellulosic (or old and new) – “are on a crash course.”
Meanwhile, the simple fact is growing corn itself isn’t real clean. “Manure trucked in and spread on cornfields releases greenhouse gases. Bacteria in the manure flood into nearby waterways, and chemical pesticides slathered on the fields leach into the ground. Transporting corn to the Midwest’s giant ethanol plants involves fossil-fuel-hungry trucks and trains.”
Two professors, Tad Patzek of Cal-Berkeley, and David Pimentel of Cornell, quantified ethanol’s efficiency and both found it has a “negative energy balance.” In other words, “it takes more energy to produce a gallon of ethanol than a gallon of ethanol can supply.” As Vanderkam notes, “Patzek said in a 2005 speech that if drivers properly inflated their tires, that would have a greater impact on U.S. energy security than switching to ethanol would.” Others vehemently oppose the two professors.
And, again, ethanol these days is about politics like in the case of Archer Daniels Midland Company, the giant agricultural conglomerate with seven plants producing ethanol in the Midwest; one-fifth of total production at this point. In 2000, Sen. John McCain said ethanol subsidies were a giveaway to companies like ADM. McCain thus made a lot of enemies in Iowa. But today, while he says he is still skeptical about ethanol subsidies, “I support ethanol, and I think it is a vital alternative energy source.” Huh.
Of course Big Corn gets the subsidies, and farmers who buy feed corn for cattle, to cite one example, suffer from higher costs when corn prices rise. Consumers of corn then suffer as well. Which begs the ethical question, as Vanderkam puts it, “In a world where people starve, does it make sense to run cars on food?”
Then again, ethanol producers would argue that Big Oil doesn’t exactly hold the moral high ground either. For now, though, the battle is really between the venture capitalists and biofuel entrepreneurs against both oil and gas as well as the old corn ethanol plants. Few believe oil will plummet back to the $30- $40 level and kill the fledgling industries.
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On a different yet vitally important topic, water, I came across an interesting table from Roger Bate of the American Enterprise Institute, who recently authored the book “All the Water in the World.”
The table is about the use of water for agriculture vs. agriculture as a percentage of GDP.
So, for example, agriculture in the United States is 1.6% of GDP, while agricultural water use as a percentage of total water use is 41%. In Japan, agriculture is 1.5% of GDP and requires 62% of the total water. Germany, though, uses up just 20% of its water for an agriculture sector that equates to 1.2% of GDP.
But in the poorer nations, such as in Africa, water use for agriculture is between 90% and 98% of the total water available; meaning that poor consumers often pay as much as 100% more for the same water. [The cost to find it, cart it, etc.] It’s about water rights and legal or implicit entitlements to the stuff.
Lastly, there are these comments on water and global warming from a column by Gregg Easterbrook in the April 2007 issue of The Atlantic.
“Whatever happens to our oceans, climate change might also cause economic turmoil by affecting freshwater supplies. Today nearly all primary commodities, including petroleum, appear in ample supply. Freshwater is an exception: China is depleting aquifers at an alarming rate in order to produce enough rice to feed itself, while freshwater is scarce in much of the Middle East and parts of Africa. Freshwater depletion is especially worrisome in Egypt, Libya, and several Persian Gulf states. Greenhouse-effect science is so uncertain that researchers have little idea whether a warming world would experience more or less precipitation. If it turns out that rain and snow decline as the world warms, dwindling supplies of drinking water and freshwater for agriculture may be the next resource emergency. For investors this would suggest a cautious view of the booms in China and Dubai, as both places may soon face freshwater- supply problems. [Cost-effective desalinization continues to elude engineers.] On the other hand, where water rights are available in these areas, grab them .
“(The) global agricultural system is perilously poised on the assumption that growing conditions will continue to be good in the breadbasket areas of the United States, India, China, and South America. If rainfall shifts away from those areas, there could be significant human suffering for many, many years, even if, say Siberian agriculture eventually replaces lost production elsewhere. By reducing farm yield, rainfall changes could also cause skyrocketing prices for commodity crops, something the global economy has rarely observed in the last 30 years.”
Easterbrook concludes on the broader topic of climate change in general:
“Why, ultimately, should nations act to control greenhouse gases, rather than just letting climate turmoil happen and seeing who profits? One reason is that the cost of controls is likely to be much lower than the cost of rebuilding the world. Coastal cities could be abandoned and rebuilt inland, for instance, but improving energy efficiency and reducing greenhouse-gas emissions in order to starve off rising sea levels should be far more cost-effective. Reforms that prevent major economic and social disruption from climate change are likely to be less expensive, across the board, than reacting to the change. The history of antipollution programs shows that it is always cheaper to prevent emissions than to reverse any damage they cause.”
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Wall Street History will return next week.
Brian Trumbore
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