It might be time to start selling ethanol stocks short. I received my first ethanol public relations spam this morning, an e-mail announcing the availability for interviews of Lee Tawes, the head of investment banking at Northeast Securities. Tawes' claim to fame? He has "underwritten the only two pure play public equity ethanol financings ever."
"Pure play" is a term of trade meant to indicate that the company at issue specializes in one thing, and one thing only. In this case, the product is ethanol and the two companies are Pacific Ethanol, a California start-up that went public in March 2005, has secured $84 million in financing from Bill Gates, and is building a state-of-the-art ethanol refinery just outside of Fresno, Calif., and Xethanol of New York City, which has patented a special form of yeast that can convert garbage into ethanol (and which went public in February).
And that's just the beginning: Ethanol companies are lining up for their stock market debut in a rush that will give dot-com boom-and-bust veterans the heebie-jeebies. South Dakota's VeraSun, already a major producer of corn-based ethanol, is reportedly planning an imminent IPO, as is Aventine Renewable Energy, the nation's second-largest producer of ethanol.
I suppose we could take all these attempts to cash in on ethanol in a positive light: Finally, the markets are taking renewable energy seriously. But there's a big problem: Most of these start-ups are focused on corn-based ethanol.
We've reported previously on the ongoing debate on just how efficient various forms of ethanol are; suffice it to say, there's a lot of disparity in the available estimates. (For an entertainingly obsessive fixation on the issue, check out my new favorite blog, chemical engineer Robert Rapier's R-Squared -- thanks to Peak Oil Debunked for the tip.) But there's little disagreement on one point: Grain-based ethanol is pretty much the least energy-efficient way to go, simply because of how much fossil fuel is consumed in the production of crops like corn. Sugar, palm oil, switchgrass... there's an abundance of better alternatives, now and for the near future.
Furthermore, as the American Prospect sagely observes in its big "green" issue, the last thing we want to do with renewable fuels is to duplicate the mistakes of the past and concentrate control of the industry in the hands of a few big corporations. The next evolutionary step after a slew of IPOs will be industry consolidation, and that means, in the case of ethanol, the usual agribusiness suspects like Archer-Daniels-Midland and Cargill. The Prospect argues that sustainable production based on local farmers should be the goal, not just in the United States, but everywhere. One can only wince at the vision of millions of tons of corn shipped by railroad from the Midwest to Pacific Ethanol's California refinery, burning up fossil fuels all along the way. But that's the plan.
I guess I won't really be excited until I hear about an upcoming IPO for a carbon-neutral Northern California biofuels cooperative that uses only sustainably produced feedstocks from local sources. But I'm not holding my breath.