SOURCE: Green Chip Stocks

October 11, 2006 17:56 ET

Dispelling the Ethanol Myth

BALTIMORE, MD -- (MARKET WIRE) -- October 11, 2006 -- A few weeks ago, Consumer Reports ran an article titled "The Ethanol Myth."

In the article, the ethanol/gas blend E85 was slammed for being less efficient than regular gasoline. Consumer Reports tested a flexible-fuel Chevrolet Tahoe and found that the fuel economy dropped 27 percent when running on E85.

According to the report, based on the average retail price of E85 in August ($2.91 per gallon), a 27 percent fuel-economy penalty meant drivers would have paid an average of $3.99 for the energy equivalent of a gallon of gasoline.

While the efficiency issue for E85 is a real one, cost analyses that compare it to gasoline rarely take into consideration the real cost of gas. In other words, what you pay at the pump is not necessarily a true representation of the actual cost.

Let me explain...

In 2003, the National Defense Council Foundation found the true cost of gasoline was more than $5.20 per gallon.

Figuring in the loss of 828,400 jobs in the US economy; the loss of $159 billion in GNP annually; the loss of $13.4 billion in federal and state revenues annually and nearly $49.1 billion in annual defense outlays to secure the flow of Persian Gulf oil -- the total economic penalties range from $297.2 to $304.9 billion annually.

Of course, this study was also conducted in 2003 -- when oil couldn't break the $40 mark.

Today we're at $60 a barrel!!!

Listen: The fact is, when you look at just the military costs that are directly related to our dependence on imported oil from the Persian Gulf... we spend tens of billions of dollars for the US Navy to protect shipping lanes, potential chokepoints and to protect oil tankers from pirates.

Though the cost doesn't get passed to you at the pump, the American taxpayer subsidizes the military protection of oil. So the real cost falls somewhere in the neighborhood of $5 to $6.

Now is the true cost of gasoline being figured into any of these equations that disparage the potential of ethanol? Of course not!

Granted, this still doesn't address ethanol's few remaining obstacles.

Yes, the E85 mix is less efficient. But let's recalculate Consumer Reports' findings using the true cost of gasoline.

With gasoline going for a minimum of $5.20 per gallon, E85 goes from its August average of $2.91 per gallon to 3.69 per gallon. (Remember, 15% of E85 is gasoline) Add in the $1.08 fuel-economy penalty that Consumer Reports highlighted, and you find that drivers would have paid an average of $4.77 per gallon for E85.

This cost difference, including the fuel-economy penalty puts E85 ahead of the game by $0.43 per gallon.

Now it's true that consumers don't see $5.20 at the pump -- but this is hardly a major concern for the ethanol industry. Because these guys know that all this rhetoric regarding energy independence is less about flag waving and more about economics. And that's what makes all the difference.

Washington knows it... and the market continues to expose it.

The only question is -- do we look for every possible reason to suppress its growth... or do we kick our American ingenuity into overdrive and foster the development of an industry that can help strengthen our energy infrastructure, provide more American jobs and reduce our exposure to the volatility of foreign oil.

The choice is ours.

But while the average Joe considers these options...Wall Street is starting to buy back shares of all those ethanol stocks that were beaten down over the past six months.

Verasun, Aventine, Pacific Ethanol -- they've all been gaining ground over the past week.

And just to add more fuel to the fire, the ethanol industry became further validated on Tuesday after oil giant, Chevron announced that through its Chevron Energy Solutions division, the company will now conduct preliminary work to prepare a proposal for the development of highly efficient production plants with a small, Kansas-based ethanol producer called Ethanex.

The proposal will include details necessary for Chevron to negotiate contracts to engineer, procure and construct at least three biofuel plants for Ethanex by 2008.

Ethanex was most likely chosen because the company integrates a fractionation technology which allows the company to produce 20% more ethanol than a plant of the same size using existing technology. And the process actually uses 25% less energy.

In the world of ethanol -- this is huge! Because you're basically talking about a technology that will allow producers to fatten revenues without adding an extra dime to feedstock, energy and water costs.

Chevron management isn't stupid. These guys know that the ethanol market cannot be stopped by lower oil prices and concerns about efficiency. The government wants it, and the market continues to dictate its growth. So basically, this is happening.

And on this go-around, it looks like Ethanex is going to be the next ethanol powerhouse to get a wink and a nod from Wall Street.

Jeff Siegel is the managing editor of Green Chip Stocks, an investment advisory service that focuses on stocks in the renewable energies markets. To read more, or sign up for a free e-letter, please go to

Contact Information