2d-Generation Ethanol: Comments and Reply

I recently submitted to AOL Daily Finance a story about the distinctions between corn-based and cellulose-based ethanol production.

I'm happy to say that the story received a lot of hits and generated a spirited exchange in the comments section.

Instead of wading into said comments section myself, I'll reply here to some of the more persistent themes.

First, a lot of the commentors complain of what I didn't write. There's nothing there about hydrogen, or nuclear power plants, or natural gas, or shuttles to the moon to mine the resources there. The only answer is the obvious one: I did not set out to write a treatise on The Future of Fuel or anything so all-encompassing. I sought to contribute a small piece to a lot of broader puzzles. There exists a circle of investors and entrepreneurs who are confident a cellulosic ethanol breakthrough is near, and I tried to give them a voice, to encapsulate their way of viewing their market and prospects.

Second, some of the commentors were unhappy about the fact that the second-generation ethanol industry, like its precursor, is in search of public subsidies. To the cry, "No subsidies to anybody!" I am entirely in sympathy. Yet in the meantime, we live in the world "that is the case," as a great philosopher put it. My own view is that some subsidies are worse then others. Some are just plain stupid. A public subsidy that encourages some people to burn what might otherwise be other people's food is in the stupid category.

Third, some of the commentors quarreled with the idea that the creation of corn ethanol raises the price of corn as food. On this point, let me note that the distinction between corn for direct human consumption and corn for livestock consumption hardly matters. The latter simply throws an extra link into the segment of the food chain under examination. Presumably, unnecessary price increases of corn intended for either purpose is a bad thing for the ultimate consumers.

More importantly, a straightforward understanding of supply and demand would indicate that corn prices should have been rising as the use of corn for the production of ethanol moved, as it has in recent years, to 15 percent of the world's total corn supply. Empirical evidence supports this expectation. Indeed, biofuel subsidies may increase the price even of foods that aren't used to make ethanol. If some consumers switch from corn meal to wheat bread as a result of the increase in the price of the former, this increases demand and thus the price of the latter.

The OECD has estimated that "[C]urrent biofuel support measures alone [would] increase average wheat prices by about 5 percent, maize by around 7 percent and vegetable oil by about 19 percent over the next 10 years."

That's just sad.

Finally, some of the commenters (like bnordq) have understood my article and in fact proven generous in their praise of it. They have my gratitude.

Cellulosic ethanol

Haven't we been here before? Ah, well.

The latest claim of a breakthrough in the development of cellulosic ethanol comes from Denmark. Two competing enzyme producers said this week that they have a product that turns straw into fuel, in a way that will allow for commercial production in about a year. Genencor, a division of Danisco, announced Accellerase DUET on Monday. But then a rival in the same country, Novozymes AS, said on Tuesday something to the effect of "we can do that too!"

Straw, that is, instead of corn. If fuel can be obtained from straw or other non-foodstuffs in a commercially practicable way that doesn't rely upon government redirection of funds from elsewhere: that will be a great move forward for the sustainability of our civilization, and for our ability to live in peace with one another.

It will vindicate Rumplestiltski's old aspiration to find a seamstress who could turn, or strictly spin, straw into gold. Now I hear the themesong from "The Beverly Hillbillies" in my head. Black gold, Texas tea. But of course one good thing about this is that it would discomfort some of the billionaires who made their money roughly the way the Clampetts did.

Yet such breakthrough announcements have come to nothing before, so it is difficult to avoid cynicism about this one.

Hybrids and diesels and shares. Oh my.

JD Power and Associates has come out with a new report on the future of the auto industry. The title gives away the thesis. It's called, "The Steady -- but Slow -- Rise of Hybrids and Diesels in the U.S. auto market."

The bottom line is a prediction that hybrids and diesels will reach a 9% share of auto sales by 2009, and that Toyota will continue to be the leading player in this market segment.

That's heartening news. I'm seldom in at the start of anything big in terms of technology shift. I'm not a gadget kind of guy. As I remember, though, I was one of the first on my block to buy a Nehru jacket back in the late 1960s when that was hot for a week or so. I was getting worried that my Toyota Prius would seem, in retrospect, a lot like that.

Yes, fellow fans of South Park, I've seen the episode. http://en.wikipedia.org/wiki/Smug_Alert!

Something will replace the internal combustion engine as the chief way in which people get around. I doubt that the "something" will be a move to mass transit in the U.S. We're accustomed to spread-out living patterns and go-when-you-want habits. Though buses and trains could conceivably amount to a larger share of the transportantion market ten years from now than they do today, I'd be willing to be heavily that it would be more than a doubling. And if they 'only' double those they carry, this wil still leave a lot of room for a revolution in the world of personal transport.

The two alternatives in the JD Power study are in effect jockeying in position to become the next Big Thing. There is also the possibility that engines will stay more-or-less the same, but that the big change will come in the area of fuel: ethanol.

Unfortunately, so long as the fuel use of ethanol involves taking corn away from food-related uses, there are limits to what could be done in that line. We can hope for a breakthrough in the area of cellulosic ethanol, which will mean we're re-cycling garbage into fuel. Here's a primer,
http://www.fool.com/investing/general/2007/03/29/new-kid-on-the-farm-cellulosic-ethanol.aspx

The news in that Motley Fool article is that a very respected figure in the Venture Capital world, Vinod Khosla, now seems to be on board the cellulosic-ethanol bandwagon.

Let a thousand entrepreneurial flowers bloom.