by Karim Rahemtulla, Contributing Editor
Thursday, November 02, 2006: Issue #601
With the price of gasoline ranging between $2 and $3.20 this year, consumers are feeling the pinch in a bad way. And it could get worse…
Demand for gasoline is actually more prone to wild swings than demand for crude oil. Why? Because few countries have the ability to refine crude for use as gasoline.That adds an extra layer of time and cost to gasoline inventories and production.
Consider that countries like Iran, which pump out more crude than 80% of the rest of the world’s producers, must re-import their own crude as gasoline because of limited refining capability.
Here in the U.S., the situation, while not as dire, is pathetic. And it could mean “barrels” of profits for the companies solving this problem…
The solution to our gas woes? Ethanol fuel – the alternative energy for today and beyond…
To Fuel a Disaster: Down to the “Last Million” Barrels Of Oil
In the U.S., there have been no new refineries built in more than two decades. And building a refinery is no easy thing. It takes years and lots of environmental studies and approvals before a refinery can start producing gasoline. There are a couple of refineries on the board right now, but the first drop of gasoline fuel from these proposed facilities is years away from your gas pump.
Politics is also a major factor in gasoline production. Since the fuel is derived from crude oil, much of the world is at the mercy of a cartel that can play havoc with supply and demand. Crude prices are determined at the margins. This means that it is not the first 30 million barrels a day that determines the price, it is that last million barrels. If those last million barrels are taken off the market, the price of crude can spike because there are no substitute sources available.
That is where the power of OPEC lies. It doesn’t have to control all the oil – in fact, the U.S. gets most of its oil from Canada, Mexico and Venezuela. But when OPEC opens or closes the oil spigots, the price reacts because they control the oil that can be pulled off the market during peak demand or supply. Right now, we are in peak demand thanks largely to China and India’s mega fuel consumption.
China in particular needs gasoline to power its tremendous growth. This is an additional demand that was just not around a decade ago. Now the demand from China, a country growing at more than 10% a year, is tugging at the margins.
Ethanol Fuel: Energy’s Long-Term Solution
There is no room for error or natural disaster in the crude oil market. Sure, you may see some short-term fluctuation, but that does nothing to address the long-term demand for crude oil and gasoline. And that demand for fuel is not projected to slow – rather it is expected to outstrip the ability to produce more oil. Therein lies the long-term problem and the long-term solution: Alternative energy.
So far, ethanol is the only form of alternative energy that has proved economically efficient. Ethanol, which is energy derived from non-carbon sources, can be produced in mass quantities around the world. In fact, some countries, like Brazil, are ethanol fuel dependent, and almost fossil fuel independent. Ethanol can be used with current engine technology with few modifications – there is no need for battery technology, hydrogen fuel cells, etc.
Ethanol is here and now. It represents one of the best long-term solutions to environmentally friendly fuels. And it has the backing of the biggest government and the biggest private investors in the world.
To be sure, the fuel does have its downsides. It has to be transported by wheel technology – there are no ethanol pipelines yet. The fuel must be dispensed through special hoses and pumps developed to withstand ethanol’s unique chemical features. Cars and trucks must be modified or built to use ethanol.
Fortunately, all of the above are being addressed in real time. Ethanol could end up replacing 12% of the gasoline market within the next five to 10 years. That’s a huge chunk of a market that is dependent on the margins for pricing. And it is feasible that ethanol can completely replace gasoline within 20 years if enough money is poured into the project. It may seem unrealistic, but Brazil has shown that it can work. For the U.S., even a 25% replacement rate would achieve significant environmental and economic savings.
There are several companies that are top players in the field. Some are pure producers, like the one that Bill Gates has invested in. Others are stealth plays that make money from ethanol fuel, but also have other investments to soften the volatility related to ethanol demand and pricing. You can also buy a company that is a major agricultural and ethanol player.
To invest in ethanol, you must have a three- to five-year time horizon. But as we will see in the “decade of ethanol,” the potential returns are incredible.
Today’s Investment U Crib Sheet
- Panda Ethanol, Inc. announced this week it plans to build a 100 million gallon-per-year ethanol plant in Texas. The plant will refine 38 million bushels of corn every year, and the fuel will displace roughly 2.6 million barrels of imported oil every year.