Tuesday, December 18, 2007

The Price of Biofuels

From MIT's Technology Review:

Making ethanol from corn is expensive. Better biofuels are years away from the gas tank. Farmers are reluctant to change their practices. But do we really have any alternative to biofuels?

The irrational exuberance over ethanol that swept through the American corn belt over the last few years has given way to a dreary hangover, especially among those who invested heavily in the sprawling production facilities now dotting the rural landscape. It's the Midwest's version of the tech bubble, and in some ways, it is remarkably familiar: overeager investors enamored of a technology's seemingly unlimited potential ignore what, at least in retrospect, are obvious economic realities.

More than a hundred biofuel factories, clustered largely in the corn-growing states of Iowa, Minnesota, Illinois, Indiana, South Dakota, and Nebraska, will produce 6.4 billion gallons of ethanol this year, and another 74 facilities are under construction. Just 18 months ago, they were cash cows, churning out high-priced ethanol from low-priced corn, raising hopes of "energy independence" among politicians, and capturing the attention--and money--of venture capitalists from both the East and West Coasts.

Now ethanol producers are struggling, and many are losing money. The price of a bushel of corn rose to record highs during the year, exceeding $4.00 last winter before falling back to around $3.50 in the summer, then rebounding this fall to near $4.00 again. At the same time, ethanol prices plummeted as the market for the alternative fuel, which is still used mainly as an additive to gasoline, became saturated. In the face of these two trends, profit margins vanished....MUCH MORE