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Wall Street History
https://www.gofundme.com/s3h2w8
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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.
---
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.”
---
Wall Street History will return next week.
Brian Trumbore
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