Saturday, May 20, 2006

The lush life of an ethanol bubble

Scott Burns, an analyst at Morningstar has written a nice article about the current excitement over ethanol. These days the stock market thinks that any company that can link itself to ethanol has future filled with wine and roses. Scott makes a sobering point, that there is a decent amount of capital infrastructure yet to be built before ethanol can be widely used.

Beyond the obvious short-term infrastructure issues, to meet our long-term needs, we would need to build a new refining, pipeline, and storage system to get the ethanol from the Midwest to the rest of the country. We basically need to recreate what the oil industry has spent the past 100 years building and perfecting. This is no small challenge and shouldn't be taken lightly. In this challenge, there will undoubtedly be numerous investment opportunities and likely an even greater number of pitfalls that investors could fall into.

At this point, my take on the ethanol boom is that it's mostly smiles and soap. Ethanol is a basic industrial chemical that can be produced cheaply from many sources. It is not special or magical. Ethanol can and is made by petrochemical synthesis from ethylene hydration. It is cheaper for Exxon Mobil (XOM) to make ethanol, on an all-in cost basis than it is for (ADM) to brew it from corn. The Saudi's are sitting on the worlds biggest supply of ethanol.


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