A Whiskey & Gunpowder Special Report:
Why Ethanol Cannot Live Up to all the “Perfect” Energy-Solution Hype
by Byron King, Editor Outstanding Investments and Whiskey and Gunpowder

EXPOSED: Leading Investment Expert
Reveals This Is NOT the Year for Ethanol

Reaping What You Sow

DID YOU KNOW that corn is a type of food? If you do, then you may have keener insight than some people who write headlines at The New York Times. I mention this because of the rather curious headline above an article in the business section of the Times (pg. C-7) on Jan. 5, 2007: "Rise in Ethanol Raises Concerns About Corn as a Food."                                                                   

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Huh? OK, let me see if I follow the logic. The background issue is that the world needs to find substitutes for depleting supplies of oil and natural gas. We know that, and you may well have heard it here first if you are a longtime reader of Whiskey & Gunpowder. We also know that ethanol is one of those potential oil substitutes. People have been running vehicles on ethanol for well over a century. But oil has been so cheap for so long that there was never any need or economic scale in using the hooch for internal combustion. (I mean, the kind of internal combustion within a vehicle engine.)

And we know that a lot of corn is presently being diverted to manufacture ethanol. This is a fast-growing industry, and we will discuss that below. But have we really reached the point where the headline writers are so value neutral on the issue of food versus fuel that they shamelessly imply that there is some sort of economic or moral equivalency between using corn to manufacture ethanol and refer to "concerns about corn as a food"? Give me a break.

Ethanol Plants and Half the Corn Crop

In true journalistic fashion, the Old Gray Lady framed the food-versus-fuel issue in the first paragraph of the story:

"Renewing concerns about whether there will be enough corn to support the demand for both fuel and food, a new study has found that ethanol plants could use as much as half of America's corn crop next year."

What? The U.S. will use half its corn crop next year to manufacture ethanol? This raises a kernel of concern with me.

As I am sure you all understand, corn that is used to manufacture ethanol will not be available for other things, like eating. Nor will this ethanol-destined corn be used to feed other animals, or turned into other foodstuffs, let alone exported to raise foreign exchange for the U.S. And of course, the price of corn will rise.

So corn-based food, and products derived from corn, will become more expensive. And I know, so you don't have to remind me, that farmers will respond to the price signals and grow more corn. But I hope you also realize that the farmers will do this by using more tractor fuel, fertilizer, pesticide, herbicide, and myriad of other substances derived from oil and natural gas. And the farmers will put into production the more marginal agricultural lands, with the less productive soils, which will then become depleted of soil moisture and nutrients. There is no free lunch.

Ethanol Plants Under Construction

According to a recent study by the environmental group Earth Policy Institute, the number of new ethanol plants being constructed nationwide has been underreported by more than 25%. According to EPI, there are 79 ethanol plants currently under construction in the U.S. When completed, by 2008, these new plants will more than double the annual U.S. ethanol production capacity, to 11 billion gallons.

This EPI estimate is a remarkable difference from the number of ethanol plants listed as being under construction by both the U.S. Department of Agriculture and an organization calling itself the Renewable Fuels Association, the main lobbying group for the ethanol industry. The Renewable Fuels Association has listed 62 plants as being under construction. The lower estimate of 62 plants has led forecasters to underestimate the amount of grain that will be needed for ethanol production. But even this does not begin to tell the entire tale.

The U.S. currently has 116 ethanol plants in production. The 79 more that are under construction will come online within about two years, allowing for some construction delays due to worldwide shortages of critical inputs and components. (The usual suspects...cement, galvanized steel, copper tubing, etc., thanks to the ongoing construction boom in China.) In addition, there are at least 200 other ethanol plants in the planning stages in the U.S., with a capacity estimated at an additional 3 billion gallons per year.

Gallons and Barrels and Energy Production

There are, according to convention dating back to the Pennsylvania oil boom of the 1860s, 42 gallons in a barrel. So the forecast annual U.S. production of 11 billion gallons of ethanol translates into about 262 million barrels of that type of fuel produced over the course of a year. And I am not even adjusting for the energy density of ethanol, which is far lower, only 59.5%, than an equivalent barrel of petroleum. The standard, accepted measurement of energy density for ethanol is 26.8 megajoules per kilogram. This clearly compares unfavorably with the energy density of gasoline at 45 megajoules per kilogram.

That is, 262 million barrels of ethanol will yield less energy when burned, less than 60%, than an equivalent volume of gasoline derived from oil. We won't go into a long discussion of that just now. Nor will we get into the energy return on energy investment (EROEI) of ethanol, which is about break-even at best. No, we won't go there. Let's keep on looking at comparisons.

Sure, 262 million is a lot of barrels of ethanol, and any way you look at it, the ethanol industry is putting big numbers into the energy equation. But let's look at some other big numbers. 262 million barrels of ethanol per year translates into about 718,000 barrels per day. (Divide by 365 days in the year.) In terms of volume, this is the energy equivalent of replacing about two supertankers full of imported oil every day. OK, not bad, and this looks like a lot of fuel if you are standing next to one of the two supertankers, but how much is it really? This is less than 6% of U.S. daily oil imports.

Let's look some more at the number, 718,000 barrels of ethanol. This number of barrels, coming out of 195 ethanol plants (116 existing plants, plus 79 under construction), averages about 3,680 barrels of ethanol per plant, per day. (More division. And yes, some plants will produce more than others.) The number 3,680 may be a lot of barrels if you happen to own the average ethanol plant, but it is a drop in the bucket of U.S. national aggregate demand for liquid fuel.

Many Plants, Relatively Low Production

Another way to look at it is that each ethanol plant, on average producing 3,680 barrels of product, will yield the ethanol equivalent of what is commonly considered to be a small onshore oil field. But consider EROEI as well. On an ongoing basis, the oil field is producing oil with only the "energy input" of the pumps that lift the oil out of the ground.

The ethanol plant requires far more energy to operate, on an ongoing basis, than does the oil field. Or for another type of comparison, few deepwater oil platforms are economic to operate if the initial production is under, say, 5,000 barrels per day. Something has to pay for those expensive day-rates for the rigs, not to mention all the labor, steel, and high-tech equipment that makes those holes in the bottom of the sea. And really, when you do the math, 718,000 barrels of ethanol translates into less than 3.5% of U.S. daily oil consumption of about 21 million barrels.

Here is another comparison. 718,000 barrels of ethanol per day is somewhat less than the amount of oil that the U.S. produces daily from its vast array of humble, old stripper oil wells, about 900,000 barrels per day. According to the U.S. Department of Energy, the U.S. has 393,000 oil stripper wells in service. And there are about 260,000 natural gas stripper wells in service. These wells are typically operated by small, independent companies and pull product out of older fields that are long past their peaks. The definition of a stripper well applies to oil wells delivering no more than 10 barrels per day and gas wells delivering no more than 60,000 cubic feet per day.

Although the stripper well industry is extensive, it is not a part of what people call "Big Oil." Yes, the stripper well industry provides a good deal of employment at, literally, the ground level of many rural areas. And it is honorable work, performed by many fine individuals, a fact to which I can attest from personal experience in the oil patch over many years. But the stripper well industry is not in any way capable of supplying the U.S. with anything approaching its cumulative daily energy demand for liquid fuel. And the corn-based ethanol industry is still quite a bit smaller than the stripper well industry.

Back to Ethanol

So let's get back to that forecast of 718,000 barrels of daily ethanol production. What appears at first to be an impressive number in terms of energy supply (11 billion gallons per year) is actually relatively small. In fact, it is almost in the "rounding error" of the nation's daily liquid fuel consumption of about 21 million barrels of oil per day. Quite frankly, the U.S. could "save" more than 3.5% of its daily oil use if the nation's carmakers built, marketed, and sold smaller cars, and if the nation's drivers collectively bought them. Or we could see much the same result if drivers collectively slowed down and drove their big vehicles at 60 miles per hour, or if more freight went via railroad, instead of truck over the highways. And would it be too much to ask the soccer moms and hockey dads of the country to consolidate their trips so as not to waste gas? Or what if more people decided to take a bus or light rail to work every now and then? And wrap your brain around this, for comparison: The amount of grain that is required to fill a 25-gallon tank with ethanol, one time, could otherwise feed one person for a year.

So will the U.S. really wind up running its motorized culture on corn-based ethanol? According to Cornell researcher David Pimental, if the entire U.S. grain crop were converted to ethanol, it would satisfy about 15% of U.S. automotive fuel needs. The answer is no.

No Energy Salvation

The take-away point here is that the full-court press now ongoing in the U.S. to build plants and manufacture ethanol from agricultural corn will not provide any sort of long-term energy salvation for the nation. This major industrial and agricultural effort will yield ethanol product equivalent to about 3.5% of daily U.S. oil consumption. According to the statistics, as published in The New York Times, no less, ethanol production from existing plants and plants under construction is on track to consume about half of the U.S. corn crop. In some localities of the U.S. Midwest, almost all corn is already under agreement to be sold for ethanol production, essentially leaving no corn for other local farming needs. This will certainly cause a ripple effect throughout many farming communities, all the way to the shelves of the grocery stores.

From a national security standpoint, large-scale ethanol production from corn will not make the nation more secure in any measurable way. It will certainly destabilize the nation's food supply and disrupt traditional export patterns.

Maybe there is a better idea out there for making ethanol from cellulose waste products. And it is not as if a

diversity of energy resources is ever a bad idea. So some production of ethanol from corn makes sense. But sometimes, just because something is a good idea, it does not necessarily follow that more of it is a better idea. It is the same thing with corn-based ethanol. Pro-ethanol agricultural, industrial, transportation, and tax policies will not provide the country with anything like the volumes of motor fuel that it needs to run the existing transportation grid. And manufacturing ethanol from corn will dramatically disrupt the U.S. food supply. Eventually, the nation will reap what it sows.

Until we meet again....

Byron W. King

P.S.- Read on for the Special Bonus Report From the No. 1 Ranked Research Advisory Letter of the Last 5 Years…

From the No. 1 Ranked Research Advisory Letter of the Last 5 Years,
Our Most Shocking Exposé in a Decade... 

BETTER THAN ETHANOL...

Wall Street Claims These 2 Ethanol Stocks Are the Best Energy Investments You Can Buy TODAY... I Say They're Both Duds! But Over the Next 3 Years, These 3 REAL ALTERNATIVE Energy Companies Are Nearly Certain to Soar...

PLUS, discovered in the depths of the landfill...

The power equivalent of 16 million barrels of oil per year... and climbing! That's right...

This unconventional $3.2 billion energy company is literally turning trash into cash for its shareholders. You'll find out just how it does it in this letter. What you learn could net you as much as three times your money.

If this dominant company nails a lucrative contract deal with the city of New York, expect to rake in those money-tripling profits - in as little as nine months!

I'll also share with you TWO more technologies that are positioned to keep churning out profits even as the ethanol industry winds down to a trickle...

• The "stealth" energy solution... promises 40% better fuel economy. It could easily make you a 50% return this year. It's already dominating Europe with its clean-power technology - and America's next

• This breakout energy company just locked in a deal with the entire state of California to provide it with the one fast-growing energy technology that's inevitable for the rest of this century... and that's just one of the mega-deals that's going to send these shares soaring.

Dear Quick Witted Reader,

I know you've heard the hype: Ethanol will replace gasoline.

And that's supposed to make shareholders in any of the many ethanol companies rich. But guess what? If you knew the shocking truth, you'd see that ethanol is NOT a good long-term investment for you... for the rest of Wall Street... or for our country.

Just ONE event, which I'll reveal to you, could change the ethanol industry forever and send the stocks reeling to recover. I'll prove this to you in the paragraphs that follow.

You'll see what Wall Street, Washington and the corn-growers' lobby don't want you to see - that ethanol will prove a disaster for the U.S. economy, that only one or two major ethanol refiners will pull through, and that most plants will close, sucking down millions of investment dollars with them... just like they did at the end of the last great gas crisis and ethanol "craze," in the late 1970s and early 1980s.

In fact, the whole chain of events that will lead to the demise of the ethanol industry has already begun. I'm going to urge you, with the proof that follows, to get your money out of the way - before it's too late.

Let me show you these charts.

There's a pretty clear pattern here...

See what's happening?

The chart above shows Archer Daniels Midland Co. These guys have been in the corn biz the longest. Supplying the food industry was their specialty. Right now, they've switched the focus from feeding you to feeding your gas tank... dominating 50% of the ethanol market.

If this is what being the BIG FISH looks like - a 28% drop - I'd hate to be the small fry!

Even the so-called "hot" small-fry ethanol stocks took it on the chin. This summer was supposed to be the hottest one of all for ethanol. It was like the dot-com boom all over again, as young companies raced to go public.

The most promising IPO, Aventine Renewable Energy Inc., shot out of the starting gate at $40 a share. But as you can see from the above chart on the right, this stock took a 49% dive, down to only $20.41 a share.

Again, this is supposed to be a safe place for your money?

Why, in the year following Bush's Energy Policy Act of 2005 - which was plump with ethanol subsidies - were the "best" stocks of the ethanol industry in a tailspin?

And why now, in 2007, as Bush pushes the ethanol "solution" in his State of the Union address... are other economies, and even our own experts, running from ethanol?

The Hidden Risk Premium Ethanol Mythmakers Don't Want You to Hear About

Ask yourself this: China, we know, also needs gas. It also grows corn - it's the No. 2 producer in the world. So why isn't China ALSO jumping on the ethanol train?

In fact, China is already the world's third largest ethanol producer.

But guess what?

While Washington ramps UP the draw on our corn supply for fuel here in the U.S., China is actually cutting back.

Yes, that's right. Beijing just nixed all new corn ethanol projects.

Xinhua news reports that the National Development and Reform Commission told local governments to STOP approving corn "industrial" projects. Because China just read the writing on the wall... and with the soaring impact on corn prices... it's placing its bets on FOOD SECURITY instead.

The Grain Price Watch Has Begun...

Here's what The Wall Street Journal had to say just days after Bush touted the powers of ethanol in his address on the State of the Union:

The percentage of the U.S. corn crop devoted to ethanol has risen to 20% from 3% in just five years... reaching the president's target of 35 billion gallons... at present corn yields... would require the entire U.S. corn harvest. No wonder the price of corn rose nearly 80% in 2006 alone...

For a decade, corn prices barely budged. Now they're nearly double what they were just a year ago. What good are slightly lower energy prices... if food prices soar?

Corn goes into your breakfast cereal. It's what farmers feed to hogs and chickens. It goes into the corn syrup that sweetens your soda, ice cream, and even cough syrup.

Says a study from UC Berkeley professor Michael Pollan, as reported in The Wall Street Journal, 52% of the content of your average McDonald's cheeseburger starts out as corn.

It's just plain common sense: We - and every country in the world - need corn first for food.

The competition between the two markets, plus other factors that already make the world corn price extremely volatile, make ethanol as an energy solution almost as dangerous as sticking with oil alone.

Think about it.

Already, grain prices in China recently climbed 4.7% - so fast, Beijing is shutting ethanol plants and canceling ethanol projects.

In Mexico, where most of the country's poor live off corn tortillas, prices have soared 30%.

And like I said, here in the U.S., corn futures are up a whopping 81%, hitting a 10-year high of $3.95 a bushel. Cattle and other meat producers are in a panic. Anyone who makes food that requires corn is terrified.

Even the Department of Labor's own bean counters say food costs, for average Americans, are already nearly double what they pay yearly for energy. Could a coming corn "crunch" force those costs even higher?

What happens if that trend continues... or even stays at a high price plateau?

You guessed it. The "safe" ethanol alternative is done for, overnight. And so are the share prices of dozens of new ethanol-based stocks.

Even worse, the ethanol stock slaughter is already happening.

Take the case of all those promising new ethanol companies going public. Many have been simply pulled off the market.

Hawkeye Holdings, the leader of the pack, planned to start selling shares at $24. This company, acquired just three months earlier by a private equity firm, was to "set the land speed record" for an initial public offering.

Looks like it wasn't fast enough!

In November, an increasingly tough corn market forced this crew to hit the pause button, before deciding "unfavorable market conditions" required them to nix the plan altogether.

After what you saw in the chart above, can you blame them? But here's what you have to ask yourself...

If these guys aren't putting themselves on the line, why should you?

NOW Is NOT the Time to Invest in Ethanol

Why am I telling you all this?

Before I explain all of that, I ought to introduce myself. My name is Addison Wiggin.

You may know me. I've worked in financial analysis and publishing for nearly 15 years. For the past six, I've also been the executive editor for the widely read Daily Reckoning.

Plus, I recently co-authored a New York Times best-seller called Financial Reckoning Day. And even more recently, I followed it up with another No. 1 best-seller, called Empire of Debt.

So you can be sure I travel in circles where exactly these kinds of opportunities get analyzed and talked about. At a level not open to everybody. For instance, just the other day I was just in a closed-door meeting with a guy named Kevin Kerr.

Maybe you've heard of him too.

He's one of the best commodities traders in the biz. You may have read his column in MarketWatch. And he's been on every major news network in the U.S. And when CNBC wants to talk about OPEC, Kevin gets an "emergency call" to go on air.

Those who follow his recommendations have had the chance to make fortunes on ethanol-related commodities like corn and sugar over the years. So what's Kevin saying now?

Click Here...

Additional Resources

Investing in Ethanol: Small-Caps Could Solve the Ethanol Dilemma

Ethanol Investment Research: Company Profiles

Ethanol stocks to get revved up about - MSN Money

Ethanol Stocks: Harvesting Risk- Wired

Renewable Alternative Energy Stocks Directory

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