Ethanol fuel, also known as ethyl alcohol, has an interesting history and an intriguing future. At one point, proponents believed ethanol would provide the path to energy independence from Middle Eastern oil. Fast forward many years and this once promising idea has yet to pan out in the way that its early supporters envisioned. New technologies, however, have arisen since then so investors should not give up on this potentially high-growth area.
Although ethanol has not replaced petroleum as the primary fuel source in the world, it has a widespread reach nonetheless. Here in the United States., most gasoline blends contain 10% ethanol. This E10 fuel came into popularity thanks to The Clean Air Act Amendments of 1990. Due to its low amounts of ethanol, E10 is not considered an alternative fuel. Even so, the sheer volume of domestic gasoline consumption has easily made the U.S. the top producer of ethanol. Companies such as Archer Daniels Midland (ADM), Valero (VLO), and Green Plains (GPRE) account for a substantial portion of this production.
Unfortunately, the transition to gasoline blends containing higher levels of ethanol has sputtered in recent years. Ethanol blends containing up to 85% ethanol (E85) and 100% ethanol (E100) have seen their growth slow in recent years. Even Brazil, the poster child of the ethanol fuel movement, has faltered. With the global financial crisis of 2008, many governments looked for ways to help their economies, which, in some cases, meant keeping imported fossil fuels at artificially low prices. To make matters worse, large oil deposits have also been discovered off the coast of Brazil while the United States continues to plow ahead and reap the economic benefits of its fracking-based energy boom in the Midwest.
These unforeseen developments have undoubtedly set back the ethanol fuel movement, but not all hope is lost. Changing global trade patterns and new technologies can potentially reinvigorate the demand for ethanol fuel. Although some new fossil fuel deposits continue to be uncovered, they are ultimately a finite resource. Ethanol on the other hand is renewable and can be created using several different methods.
Current large-scale ethanol production typically relies on agricultural crops such as corn, sugar cane, potatoes and wheat. Not all bioethanols are equal, however, as Brazil’s sugar-cane derived ethanol is much more productive and environmentally friendly than its corn-based counterpart in the United States. As a result, it is not surprising that flex-fuel systems have become the standard in Brazil. These systems are capable of using pure ethanol in addition to lower-blend regular gasoline and allow customers to choose at the pump.
Among the newer developments in this arena, cellulosic ethanol holds much promise. By leveraging recent technological advances, previously unusable lignocellulose in the form of agricultural residue, wood waste, grasses and even algae can be converted into fuel-grade ethanol. Although costs will need to come down in order to compete with traditional fossil fuels, this exciting technology has much upside.
With the proper marketing, cellulosic ethanol’s ability to turn garbage into energy may become the trump card that the renewable energy movement has long sought after. Indeed, this nascent technology is exhibiting remarkable growth. New cellulosic ethanol add-ons are springing up in Iowa, a logical fit for this leading corn producing state. Earlier in the year, Quad County Corn Processors beat out DuPont (DD) and Poet in producing the state’s first commercial cellulosic ethanol from unused corn fibers. Across the Pacific, a joint venture between M&G Chemicals and Anhui Guozhen has announced plans to construct the world’s largest cellulosic ethanol biorefinery in China.
Meanwhile, some chemicals companies have approached ethanol from a different direction. Instead of relying on biological food stocks, Celanese’s (CE) TCX technology converts natural gas or other hydrocarbons into acetic acid, which then yields ethanol through hydrogenation. This process is relatively cleaner than its corn-based counterpart, and circumvents the controversy of using precious food stocks to generate energy at a time when world hunger is a growing issue.
In particular, emerging economies with large populations, such as China and India, will find this alternative form of ethanol very appealing as their rising middle class craves more energy. Although Chinese regulatory reforms have introduced some uncertainty of late, Celanese has its sights set on producing 1 million metric tons of ethanol per year by 2016. Meanwhile, India’s ambitious government mandates for E5, E10 and E20 fuels ought to drive demand for ethanol-blended fuels over the coming decades. According to some projections by ICRIER and NCAP, India's ethanol demand will likely rise to around 11 million metric tons by 2024. Limited arable land and a growing population will prevent bio-ethanol from satisfying this growing hunger for the fuel. With roughly 8 million metric tons of projected unmet ethanol demand in India alone, alternative ethanol-production methods can help fill the global energy gap and provide significant upside for their companies.
As governments around the globe seek legitimate ways to lessen their dependence on foreign energy, ethanol will likely regain some of its former luster. The current boom in oil production is unlikely to continue indefinitely. Moreover, the recent increase in geopolitical instability serves as a stark reminder that foreign energy comes with many pitfalls and risks. That said, ethanol is unlikely to turn into an overnight sensation. It will take some time, but ethanol technology has the potential to play a major role in the future where clean man-made fuels are the norm. Savvy investors will want to keep this long-term trend in mind as buying opportunities become available.
