Financial meltdown slams corn ethanol and threatens mass transit, but Big Oil still riding high

(Photo of ethanol plant from Flickr and and photographer freddthompson, actor, senator and presidential candidate)

Weekly Angst: Because of the financial meltdown, ethanol companies are struggling and some are going under. Caught between corn contracts signed last summer when prices were sky-high and lower fuel prices, and with credit hard to come by, businesses are seeing the ethanol bubble of the past year burst. Investors have lost billions. VeraSun Energy, for example, expects to lose up to $103 million this quarter. Its stock is down 90% from its peak earlier this year. And ethanol companies in Kansas and Ohio declared bankruptcy last week. The Agriculture Department is considering loan guarantees to keep ethanol businesses afloat.

Mass transit hits trouble
Mass Transit agencies are also caught in the crunch. They face having to pay banks billions as old financing deals fall apart. The problem was triggered by the failure of insurance giant AIG, which guaranteed deals between the agencies and banks. Because of long-standing agreements to give banks tax shelters by selling them rail cars and then leasing them back, some 30 mass transit agencies around the country are now in danger of having to pay back their loans all at once. Washington, D.C.’s Metropolitan Area Transit Authority is the first to be hit. KBC Group of Belgium wants $43 million by next week. The feds may have to get in the middle of this one too – to keep the trains running.

Other repercussions include cancellation of a coal-to-liquid joint venture between Consolidated Energy and Synthetic Energy Systems and the delay of a SunCor Energy oil sands project in Canada. (No tears shed over those).

Major oil companies in good shape
So how is the meltdown affecting Big Oil? With prices dropping rapidly you might think they’re feeling the pain. But apparently not. With record profits last year, they have reduced their debt and are cash fat. So now they can buy up distressed smaller rivals and make deals with resource-heavy countries. Production may be down, but refining should be profitable this year. And they expect less pressure to pass windfall profits taxes. So lower prices and lower demand don’t really bother them. (No one ever said life is fair.)

On the bright side
The economic downturn could benefit green technology, though. It could give government a historic opportunity to climate-proof its infrastructure as part of a public works effort to generate jobs. This may translate into an investment opportunity, says a recent report from Deutsche Bank. The International Energy Agency has called for a $45 trillion investment in climate related technology by 2050. And Deutsche Bank says renewable energy investments have more promise in the long term than tradition energy sources.

At the same time, venture capital continues to flow into Silicon Valley and California in general. VC investments in energy and utilities were up in the 3rd quarter 90% over the same period last year, as investors pulled back from other sectors like information technology, media and financial services. Clean tech reported a record $1.08 billion in investments, most of it going to solar. In the Bay Area, which includes Silicon Valley, overall VC was up 22%, the highest single-quarter total since 2001. One benefit of green technology is most of it is tied to government policy so it’s not as vulnerable to swings in the market.
Observers are waiting to see the results of this quarter, however, anticipating that falling oil and carbon prices could have an impact. VC fell in the third quarter in other parts of the country.

And Neal Dikeman, of Jane Capital Partners, warned that a prolonged financial crisis could have an adverse effect on a 2012 post-Kyoto international agreement to fight global warming, by either delaying or weakening it.

For additional comments on the financial crisis’ impact on climate change see my earlier post.

(Sources: Greenwire, Washington Post, Wall Street Journal)

A week of news on ethanol and hunger

(Photo of cornfield from Flickr and photographer vampire_bear)

Weekly Angst: Not long ago some touted ethanol as an answer to fossil fuels. The Bush administration said it could save us from our “dependence on foreign oil.” In the U.S., for now, ethanol means corn – that’s what’s being produced and it’s popular in farm states like Iowa and Illinois. But scientists have pointed out life-cycle carbon emissions from corn ethanol are about as bad as from gasoline – and its potential supply is limited. Even Bush recognizes we need to move quickly to non-food, cellulosic products and the new Energy Bill calls for that to happen. But, recently an even greater concern has arisen. Corn prices have skyrocketed, farmers are switching from other crops, like wheat and soybeans, and now they are soaring in price too. Hunger on the rise as food costs grow and supply can’t meet demand. A series of news items over the past week tell us where we are right now with this dilemma.

News item: Midwest drought could spike food, gas prices
Increased dependence on corn and other grains for feed, food and fuel leaves the country vulnerable to a weather catastrophe that could cut supply and push prices up even more. The price of corn is already up 20% this year. Corn could reach $8/bushel (from $5.40 now) if a drought or heat wave hits the Midwest, experts say. A problem could occur as early as this summer, as global warming and La Niña increase the likelihood of drought. (LA Times, 3/2)

News item: Tough times for ethanol force shakeout
High corn prices are squeezing profits at small ethanol distillers. Production capacity nearly doubled in the past year to 8 billion gallons a year, but the high price of corn, and of natural gas to run the distilleries, is leading to consolidation and some bankruptcies. There are also problems getting the product to customers. While farmers benefit, profits for ethanol companies hit a low in November, surged briefly when Congress passed the Energy Bill, and now are dropping again. (Reuters PlanetArk 3/3)

News item: UN warns of ‘new hunger’ as food prices surge
A perfect storm of high food and oil prices, low food supplies, climate change, demand from China and India, and diverting crops to biofuel are causing a food crisis, the executive director of the UN World Food Programme said. The “newly hungry” have money but will be priced out of the food market, adding to the 25,000 worldwide who die each day from hunger now. Record food prices are likely to continue for several years and will cause social unrest and anarchy in the streets, she warned. Afghanistan is one of the most vulnerable nations. One solution is to use more land for food, less for biofuel, she said. (PlanetArk, 3/3)

News item: U.S. won’t meet its ethanol mandate, EIA says
It’s unlikely we’ll meet the Energy Bill ethanol mandate of 36 billion gallons/year by 2022 because of the lack of “advanced” cellulosic ethanol, the Energy Information Administration told a Senate committee. Instead EIA foresees 32.5 billions gallons/year. Most U.S. ethanol is now made from corn, with only small production from switchgrass, wood chips and other agricultural and forest waste, boding ill for the future. The projection assumes the end of tariffs on ethanol imports and significant supply coming from abroad. (PlanetArk, 3/5)

News item: California company begins cellulosic refinery
Ethanol company BlueFire will soon build a cellulosic refinery next to a landfill in Lancaster, Calif., to make ethanol from grass clippings, tree trimmings, and other biomass. The goal is to produce 3.5 million gallons by the end of the year, and eventually 17 million gallons a year. By 2011, the company hopes to be building 5 refineries a year, with a capacity of 55 million gallons each. The federal government is providing up to $385 million to BlueFire and 5 other companies for capital costs to build cellulosic refineries. (Greenwire, 3/3)

Ethanol's unintended consequences

Weekly angst: A glass of beer costs more in Germany because the price of barley doubled in two years. Mexicans rioted last summer because they couldn’t afford tortillas. A key ingredient in soap is getting scarce because it’s now used to supplement feed for cattle. All these are unintended consequences of the growing demand for corn ethanol.

Corn is currently the grain of choice for the boom in biofuels, though soy, palm oil and sugar are in play. Corn ethanol is subsidized, can be made cheaply and has a strong lobby in the U.S., where the crop is now bigger than at anytime since before WWII. Corn enthanol production has grown 80% in 2 years and takes 24% of the nation’s corn crop. So corn prices have gone up from $2 a bushel to an average of $3.35, spiking to $4. The price is at an 11-year high. There are 111 ethanol plants here and another 235 in construction or on the drawing board. If all are built, they would use half the U.S. corn crop, leaving less for consumption by people and livestock.

All this happened before the Energy Bill was passed in December, calling for 36 billion gallons annually by 2022, 15 billion of which could come from corn. Production is now about half that, at 7 million, but growing rapidly. The bill specifies that after 2016 a higher and higher percent must come from “advanced” ethanol, like cellulosic, which is better for the environment. But it looks like we’re in for a big increase in corn ethanol over the next 8 years and beyond.

And that presents all kinds of problems:
1. Rising food prices
2. Little change in greenhouse gases
3. More toxic fertilizer and pesticides
4. Use of scarce water resources
5. Deforestation and loss of biodiversity

Rising food prices
Corn prices have doubled since September 1906. As farmers shift to more profitable corn, soy, wheat, barley and other crops have become scarce and expensive. Inflation for food is now forecast at 7.5% a year during the next 5 years. And there is growing concern for the very poor of the world who will be unable to afford the basics. Every 1% increase in food staple prices will result in a 0.5% loss in caloric intake, the World Bank says.

Environmental damage
Corn uses fossil fuels to fertilize, grow, harvest, manufacture and transport corn ethanol, so when all is said and done the lifecycle reduction in greenhouse gases is minimal at best. Corn absorbs less nitrogen than other plants, so it runs off into rivers, including the Mississippi, where it adds to the “dead zone” in the Gulf of Mexico, hurting the fishing industry. The Sierra Club successfully sued plants in Iowa and Indiana that were making neighbors ill from toxics in the air and water.

Using precious water
Corn ethanol requires 3.7-5 gallons of water to make 1 gallon of fuel. Many regions of the country are already water-starved and can ill afford to share their drinking water with thirsty biofuel plants.

Deforestation and loss of biodiversity
As ethanol crops become more profitable, more grassland and rainforest is turned into farmland, reducing biodiversity in its wake. This is happening in Indonesia, where palm oil is used for ethanol and in the Amazon where sugar cane is the dominant source. One of the unintended consequences of Europe’s biofuels mandate several years ago was that economics led them to outsource farming to developing countries. Clearing rainforests and transporting fuels back to Europe negated the GHG benefits of biofuels over gasoline.

Is cellulosic ethanol the answer?
Cellulosic ethanol is better for global warming but it now costs twice as much to make as corn ethanol. But producers say the energy bill will act as a catalyst and help bring down the price.

Switchgrass is expected to be the main cellulosic feedstock in the future. It produces 5 times the energy it uses, and the lifecycle emits 94% less CO2 than gasoline, according to Reuters.
Other advantages:
• It is not used for food or feed, so won’t pressure prices
• It can be grown on marginal land
• It helps sequester CO2 in land because its root system remains after harvest
• It requires less irrigation and fertilizer
Other potential sources of cellulosic ethanol include corn waste, wood waste, sugar cane waste and poplar trees.

Range Fuels recently broke ground in Georgia for the first plant to make commercial cellulosic ethanol from wood waste. It is one of 6 companies to get a grant from the Dept. of Energy and expects to make 20 million gallons a year initially and 100 million eventually. Range is owned by Sun Microsystems’ co-founder, Vinod Khosla.

POET, the largest U.S. ethanol producer, expects to make commercial levels of cellulosic ethanol from corncobs by 2013.

Several other cellulosic plants are in the planning stages, including one in northern Michigan that would use timber and wood byproducts, and another in Florida that would use sugar cane waste and woodchips.

(Sources: Reuter’s PlanetArk, Greenwire, Associated Press, The Guardian, The Wall Street Journal, Union of Concerned Scientists, Truthout.com)