In my May article, Food Shock , I mentioned that biofuel production was consuming many of the crops normally used for food. Riots have broken out over the sharp price rises of 37% last year, and 16% so far in 2008. Coffee, soybeans and wheat are increasingly diverted to biodiesel production, driving prices higher. Almost a quarter of America's corn crop was distilled into ethanol last year, and the percentage is expected to grow another 10% in 2008.
The U.S. has been heavily criticized for subsidizing corn ethanol while restricting the import of Brazilian sugar ethanol, as sugar is about six times as economical a fuel source as corn. Many experts agree that corn ethanol is not very efficient, but claim it's just a “bridge” to the development of cellulosic ethanol. This embryonic technology is touted as the missing link to America's energy independent future.
However, the 2005 U.S. Department of Energy/Department of Agriculture joint plan to produce 130 billion gallons of ethanol has many flawed assumptions. It presumes a 50% increase in grain crop yields while gathering most of the excess biomass left on the fields. This action would leave them vulnerable to erosion and severe soil depletion, which would decrease productivity. Higher grain production would further stress limited fresh water resources, and lead to increased deforestation as lands were cleared for planting.
Even if higher output was possible, more grain requires the use of much more fertilizer and pesticides. These chemicals are largely composed of petroleum which is the fuel we're trying to use less of!
The government's plan expects 55 million acres will be dedicated to energy crops like switchgrass in the future. However, only 70 million acres are planted with corn today. As there is a limit of arable land, cellulosic ethanol production would chase out much of current food and timber production.
Cellulosic ethanol will not be a cheap fuel. To reach the U.S. mandated 21 billion gallons of this ethanol by 2022, it's projected to require a hefty subsidy of $1.55 per gallon. In addition to the logistical nightmare of trucking a ton of biomass to be processed into 80 gallons of ethanol, capital expenditures at a cellulosic ethanol plant are projected to be two to three times that of grain ethanol plants.
In the alternative energy debate, it's important to question if ethanol is a good idea at all. It lowers fuel efficiency in cars by 30% over the same amount of gasoline. If you are using 10% ethanol gasoline as we must in Dallas, it shaves 3% off your mileage even if it doesn't negatively impact performance. If you switch to E85 fuel, your car will require about 1.5 times as much fuel per mile, and your fuel pump and injectors will have to be larger to allow an adequate amount of energy to reach the engine.
Senator Thune of South Dakota, a major ethanol producing state, claims that ethanol saves the consumer 50 cents per gallon. However, the lower fuel economy overrides that benefit. Ethanol can corrode steel and polymer engine parts that were designed for gasoline, so your repair costs may climb as well. U.S. taxpayers also have to shoulder the cost of ethanol subsidies, so government intervention is hardly free. If the subsidies disappear while mandates remain, the direct cost will jump substantially as well.
Ethanol creates new transportation and safety hassles as well. It can't be moved via pipeline, so it has to be shipped via ship, truck, or railcar. Transportation opens up opportunities for accidents and fires. Unfortunately, most fire departments lack the training and specialized supplies necessary to meet the unique challenges of ethanol blazes. Ethanol vapor is more flammable than gasoline, and its nearly invisible flame can't be extinguished with water.
So if ethanol is not the solution, are we stuck with burning fossil fuels in our cars? Sapphire Energy doesn't think so. Sapphire is a company founded to answer one question, "Why is the biofuel industry spending so much time and energy to manufacture ethanol - a fundamentally inferior fuel?"
Instead of trying to fix problems with ethanol, the founders of Sapphire Energy - a bioengineer, a chemist, and a biologist - set out a year ago to make transportation fuel from a renewable source. They chose a source that is not used to feed humans or livestock - algae. This plant-like organism has a lot of potential as species contain up to 50% oil. While corn can only produce about 20 gallons of oil per acre, algae could potentially yield 20,000 gallons.
Apparently Sapphire has succeeded in converting algae to fuel. The company announced the production of 91-octane gasoline as well as jet fuel. To boost Sapphire's technical team, they hired Dr. Brian Goodall away from Imperium Renewables, as his team delivered algae biofuel for Virgin Atlantic's trans-Atlantic flight.
This start-up emphasizes that their product is not biodiesel or ethanol, as it can be used safely in gasoline engines without need for modifications. This “green crude” can be processed in our current oil refineries, without the need to build a new infrastructure.
Sapphire claims that their fuel is very environmentally friendly. When burned, it has virtually no emissions since it doesn't contain nitrogen or sulfur compounds. Production requires very little water unlike ethanol. In fact, the algae can be grown in brackish or salty water, even wastewater. Another advantage of this “green crude” is that the algae absorbs carbon dioxide from the atmosphere.
ARCH Venture Partners, and Venrock, two venture capital firms, and the Wellcome Trust, a British charity are enthusiastic about the potential. They have invested a total of USD $50 million in the company. ARCH is so confident in the technology that this firm declared their “checkbook is completely open.” With this solid funding in place, Sapphire expects to have a pilot project running in three years, and commercial production in five. The fuel is expected to be cost-competitive with petroleum.
Sapphire Energy isn't the only company researching algae-based fuel. Other start-ups include GreenFuels Technologies of Massachusetts, AquaFlow Bionomic of New Zealand, and Synthetic Genomics of California. Unfortunately, these companies are all in early stage development, and I don't know of any public companies in this area right now.
Even though the public can't invest, this field is definitely worth watching due to the potential for disrupting the energy marketplace. It will take years for “green crude” to enter commercial production even if one of the start-ups is successful, but the impact on ethanol would be enormous. Already there is mass public dissatisfaction in the U.S. with the ethanol mandate due to the rising food prices blamed on this fuel. If the law doesn't change by the time algae-based fuel arrives - which I find unlikely - the pressure would be tremendous. This would be even more true if the promise of cellulosic ethanol was unfulfilled.
Assuming the U.S. government was no longer artificially supporting the corn ethanol market and “green crude” was as powerful as advertised, I would expect a sharp drop in the agricultural markets. Corn ethanol would become functionally obsolete. Grain prices would fall as food would gradually be removed from the fuel production stream. As this disruption in commodities would ripple throughout the U.S. economy and effect my recommended asset list, I will stay alert for any change in the political winds in Washington.
by Jennifer Barry
Global Asset Strategist
Copyright 2008 Jennifer Barry
Hello, I'm Jennifer Barry and I want to help you not only preserve your wealth, but add to your nest egg. How can I do this? I investigate the financial universe for undervalued assets you can invest in. Then I write about them in my monthly newsletter, Global Asset Strategist.
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