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Are ethanol’s days now numbered?

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Are ethanol’s days now numbered?

The world’s energy needs are going to require a lot of sources to power the future. Ethanol has been widely used as a fuel additive in the United States, and currently makes up 10% (or in some cases more) of almost all of the gasoline sold nationwide. Considering that more than 130 billion gallons of gasoline are sold annually in the U.S., that’s a lot of ethanol.635630652594255762-AP-Gas-Prices

However, there are definite questions as to ethanol’s viability both in the short and long term. With that in mind, we asked two of our energy experts, Travis Hoium and Jason Hall, for their thoughts on ethanol. Here’s what they had to say. Ethanol was really the first “renewable” energy source that made big inroads in energy in the U.S., well before wind or solar energy became the industries they are today. But ethanol’s fundamental flaws have become more challenging than many ethanol fans want to admit and make this a poor industry for long-term investors.

The first challenge is that ethanol isn’t abundantly available or even truly renewable, there are trade-offs in producing ethanol. For example, if we increase production of ethanol that means we’re using land that could have been used to produce food to produce energy. The food or fuel debate may have been politicized, but it’s true that increasing ethanol production increases food costs, which is why farmers love ethanol so much.

Ethanol is also in a tough strategic position in the energy industry. If ethanol production goes up, demand for oil goes down, which will lead to lower oil prices, making ethanol less competitive. Worse yet, when ethanol production goes up the cost of its feedstock goes up, reducing its competitiveness in the market. This is why ethanol has relied on government mandates and subsidies to remain in business. But these subsidies should be short term until the industry can get to a competitive state economically. Clearly, that hasn’t happened or we would all be driving ethanol vehicles because it would cost less than oil.

I’m not one for making environmental issues a key part of any investment thesis but in the case of ethanol it is a key flaw in the industry. You have to consume energy just to create ethanol and in the U.S. most of that energy is going to come from burning natural gas or coal. This makes the resulting ethanol far less clean than the industry will advertise.

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