Ethanol Is on Life Support… For Now

Editor’s Note: We find we run up against two sides of facts when measuring ethanol as a distillate and as a fuel. Oil barrels are measured as 42 gallons per barrel, while distillates are measured under the alcohol barrel of 31 or 31.5 gallons per barrel. If you chose the former, then producers are still pumping out over 13 million barrels of ethanol, a large amount regardless of which measurement you prefer. Ethanol is controversial and will be an interesting energy story that we will continue to watch and update our readers as approriate. You can decide for yourself through Wikipedia and learn more about Ethanol .

With the crash of the ethanol industry, investors have seen a stunning reversal of a technology that seemed so profitable only a few quarters ago. Dozens of plants have been shuttered, and many more plants on the drawing board or in construction have been axed.

And the way the press spins it, ethanol will never be used again in the United States.

But that’s just wrong. Let’s not count this nascent industry out before it’s really had a chance to shine. Some of its biggest obstacles are centered on its major component: corn. The cost of corn plays a major part in squeezing profits – literally – from ethanol.

Just when the industry was starting to take off, the price of corn was skyrocketing. And many of the first movers like Verasun (OTC: VSUNQ) and Pacific Ethanol (Nasdaq: PEIX) got locked into pricey, long-term contracts. As prices for corn and fuel plummeted, they were left holding the bag.

Unlike many established commodities-based businesses, ethanol producers haven’t had the history to plan and prepare for the bad times. They don’t have decades-old strategies for locking in low corn prices and carefully hedging their bets. This will come in time to those who make it through the current “economic winter.” Unfortunately, many won’t.

But those that do survive will be well placed to control the industry. Lets not forget that ethanol producers cranked out over 18 million barrels (1 barrel = 31 gallons) of ethanol for the U.S. market in 2008.   

If ethanol pioneers like Aventine Renewable (NYSE: AVR), BioFuel Energy Corp (Nasdaq: BIOF) and Green Plains Renewable Energy (Nasdaq: GPRE) can get their cost structure correct, these companies should profit nicely. Until that point, they might need some intensive care.

Companies mentioned in this article: VSUNQ, PEIX, AVR, BIOF and GPRE.

• Corn Crop Numbers Boost Ethanol Producers
• Renewable Energy Rollercoaster
• Alternative Energy Investments: Three Scenarios For Clean Energy

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One Response to “Ethanol Is on Life Support… For Now”

1. graham perry Says:
   February 19th, 2009 at 12:43 pm

   ‘Ethanol is on life support’ article above quotes “(1 barrel = 31 gallons)”, but 1 barrel = 42 US gallons, or 35 Imperial gallons. Is there a special barrel for measuring ethanol in volumetric units?! Or was this an error?

   Reply

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