By Sara Nunnally, Editor, Smart Investing Daily, taipanpublishinggroup.com
Yesterday, President Obama announced that he would seek a one-third reduction in crude oil imports by 2025, as part of a new energy policy… one that would include a shift to cleaner-burning fuels, according to the Associated Press.
This is perfect timing with the article I wrote about investing in oil and ethanol. We’ll get back to Obama’s initiative in just a minute.
It seems my article from Tuesday struck a nerve with you. No surprise. Alternative energy in all forms has cheerleaders and detractors. I’ve taken my fair share of ribs from readers over the years, so I expected some opinions on my ethanol article.
Here are a couple:
I live in New Zealand but invest in the US stock markets (ours is tiny). I was interested in your article on ethanol a product that is not that popular here. I am also interested in the many reports about the American economy leading to suffering by your people because of rising prices for commodities. By your standards we in New Zealand are destitute. For example we are paying $2.15 a litre for petrol which translated into US Dollar terms, equals $10.82 a gallon. The bread (plain white not fancy) cost $5.32 US (exchange rate 0.75224). Our national average wage is $54. You work it out, then maybe you will see that Americans don’t necessarily have too much to complain about after-all. — J.B.
The ethanol gas is burning up outboard motors. I wish there was some way to stop it and put the corn into food products. — W.W.
I have read and reread, still not sure — are you saying this is a good time to invest in ethanol or avoid it???? If the supply of imported crude oil becomes restricted, how many days would the 18 Million barrels provide? How long will it take to increase production output?? I have a small farm I am trying to sell (40 acres), is this the time to hold out for top money or maybe even take it off the market?? — B.B.
Several years ago, I was writing for a publication called Material Profits, a newsletter analyzing commodities and commodity-based companies. One of my pet sectors was alternative energy (thus the ribbing).
Back in 2007, I wrote an article comparing oil consumption growth between the United States and the European Union.
In response to J.B.’s comments, I said that cheap oil and gasoline has done more harm to the United States than good. I believe if the government levied more taxes on the stuff we’d be using a lot less of it, and we’d have implemented more efficient technologies to make better use of what we do use.
For example, the higher taxes on fuel in Europe has led to near stagnant growth in oil consumption (excepting the inclusion of new EU member states), whereas the cheaply available oil and gasoline in the U.S. has led to continuous growth in consumption.
Indeed, between 1990 and 2007, the 27 members of the European Union increased consumption of oil by 3.8%. During the same timeframe, the United States experienced a 21.7% growth in oil consumption.
No surprise, then that most European-model cars have better fuel economy than U.S. cars (though this is starting to change). Also no surprise that Europe has an extensive train system and better public transportation in city centers than many urban areas in the U.S.
As far as agricultural commodities go, the U.S. is in an easier position, as we are the world’s largest grower of corn, the fourth-largest producer of wheat, top producer of soybeans, and fifth-largest grower of oats. This might have an effect on lower food prices as compared to J.B.’s food prices in New Zealand, though I haven’t done the research on how many grain commodities are grown in your country.
That’s not to say food prices aren’t climbing… or having a negative effect on people’s pockets. Interestingly, our government does not count the price increases in food and fuel in inflation statistics, which will have greater ramifications down the road.
There’s no denying that higher food prices are already weighing on people’s income. That’s why many people, like Smart Investing Daily reader W.W., believe that we shouldn’t be wasting corn on fuel.
(Investing doesn’t have to be complicated. Sign up for Smart Investing Daily and let me and my fellow editor Jared Levy simplify the stock market for you with our easy-to-understand investment articles.)
But there’s a difference between food corn and feed corn. Feed corn is what corn-based ethanol is being made from. Feed corn is what’s fed to livestock, not people.
As I noted in Tuesday’s article, it’s not clear how much acreage has been removed from food production to be used to plant feed corn specifically for ethanol production, though I am sure that this has happened at least on some level.
As to W.W.’s other comment, it’s true. Ethanol can be harmful to some engines, mostly smaller engines like those on boats. But for cars, most engines can run on up to a 10% blend of ethanol without any harm coming to the engine, and without any modifications needed.
But let’s move on to B.B.’s questions, and let me clarify our current stance on investing in ethanol.
Yesterday’s announcement from President Obama set up the lofty goal of mandating all cars purchased by federal agencies after 2015 be alternative fuel vehicles. This means, hybrids, electric vehicles, natural gas vehicles and flex fuel vehicles (cars that run on a high blend of ethanol or other alternative fuel).
That sent some ethanol producers higher, but it’s clear that Obama favors electric vehicles, as he wants 1 million electric vehicles on the road by 2015.
In short, the ethanol industry needs some more support.
At least, this is what Poet CEO Jeff Bruin told the Senate Agriculture Committee, as per Reuters. Poet makes cellulosic ethanol, which is where the biofuels industry is headed at an aggravatingly slow pace.
Things like subsidies and blending targets are coming under scrutiny from Congress. The House of Representatives passed legislation that rolls back the EPA’s decision to raise ethanol blends from 10% to 15%. Reuters also reports that other proposals are seeking an immediate end to the 45-cent per barrel subsidy that ethanol currently has.
Combine this uncertain future with high feedstock and fuel prices and ethanol has an uphill battle to remain competitive.
To speak plainly, even though I think we should — as a country — be using ethanol as an alternative fuel, it’s not a home-run investment like it was six years ago.
The 18 million barrels of ethanol inventory could not replace oil one-for-one should import supplies be pinched. We have a Strategic Petroleum Reserve for that, and it’s filled to the brim with 727 million barrels of oil, enough to last us about 38 days if oil production and imports completely dried up.
According to the Renewable Fuels Association, the U.S. has 204 ethanol refineries in operation producing some 13.67 billion gallons a year. There’s a further 522 million gallons of production capacity under construction. How quickly this extra capacity will be brought on line depends on demand and the cost of production.
If producers lose their subsidies you can expect a lower number to come on line.
As far as your farm, B.B. — best of luck to you. There was a 39-acre farm down the road from me that just sold… but there are plenty more where that came from. And from a quick search on Realtor.com in a couple of the major corn-producing counties in Michigan, prices are being reduced on farms or ranches for sale at nearly every price point, except the very lowest, if there were any listings at all.
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About the Author
Sara is Managing Editor of Smart Investing Daily. As Senior Research Director and global correspondent, Sara Nunnally’s diverse resume includes studies in art history, computer science and financial research. She has appeared on news media such as Forbes on Fox, Fox News Live, and CNBC’s Squawk Box, as well as numerous radio shows around the country. Most recently, Sara co-authored a book with Sandy Franks called, Barbarians of Wealth.
As Senior Research Director, global correspondent and managing editor of Smart Investing Daily, Sara has traveled all over the world in search of the best investment opportunities to recommend to her readers, be they in developed economies like France and Italy, in emerging markets like the Czech Republic and Poland, or in frontier terrain like Vietnam and Morocco. Her unique “holistic” approach of boots-on-the-ground research has given her an edge in today’s financial marketplace as she searches for the next investment opportunities in hot sectors like alternative energy, currency markets and commodities.
