“Industry growth has been mainly driven by favorable public policy decisions,” Elif Acar, an analyst at Standard & Poor’s, says in a research report. "Several states mandate adding a 10% blend of ethanol to gasoline … and provide further state-level tax incentives for ethanol use. Some states, especially those in the Midwest where corn is grown, provide incentives for the construction of ethanol facilities as well.”
The World Economic Forum annual meeting in Davos, Switzerland this week will discuss conservation and sustainable energy. There are great economic risks in shifting away from fossil fuel and the politics will be knotty. There’s also a basic question: Does anyone care?
The short answer: Yes. The ethanol sector has launched two high-profile IPOs -- VeraSun Energy and Aventine Renewable Energy Holdings -- and attracted the attention of Bill Gates, Microsoft’s co-founder, an investor in Pacific Ethanol.
Ethanol got another boost Tuesday night when President Bush once again used the State of the Union address to push energy efficiency and the increased use of alternative fuels. The President Tuesday called for a 20% reduction in gasoline use in the next ten years, tougher fuel-economy standards and increased mandates for the use of ethanol and other alternative fuels.
“For too long, our nation has been dependent on foreign oil,” Bush said.
High profile political support for support for ethanol, however, is already two-decades old.
In 1979, the U.S. Congress approved ethanol production subsidies in response to an embargo by the Organization of Petroleum Exporting Countries. Federal subsidies have exceeded $10 billion through 2006. The Clean Air Act of 1990 created additional demand for ethanol by increasing its use as a gasoline additive to replace MTBE, a pollutant.
Blending ethanol with gasoline permits refiners to produce greater quantities of lower octane fuel, cutting production costs. Use of ethanol as an additive increases octane, reduces pollution and increases the volume of available fuel.
Ethanol depends heavily on governmental subsidies and mandates. But government can’t mandate the price of corn and other commodities used to make ethanol and the sector’s profits can be clipped by an increase in the price of corn or the natural gas used in production a s well as increased transportation costs for raw materials.
David C. Nelson, an analyst at Credit Suisse, recently cut his fiscal year 2008 earnings estimate for Archer Daniels Midland, a major ethanol producer, to $1.69 a share from $2.30, below the consensus estimate of $2.72.
“Our key underlying assumption is that ethanol margins revert toward historic norms near 20 cents a gallon, compared with over 70 cents last quarter,” he says in a research report.