JBL: Defending Ethanol

As much as I love and respect my friend Jim Cramer, I have to disagree with his view that ethanol is a fad. I agree some companies are overvalued, but I don’t believe that ethanol itself is a fad.

Jim is right, as he normally is, about solar. Solar is a renewable energy whose cost will actually increase in the next couple of years due to capacity constraints in polysilicon. Solar is not and will not, at least for the foreseeable future, be an economical alternative (without huge subsidies) to other sources of energy.

But ethanol is not a fad. Ethanol is not a dot-com. I believe the trend is real; the only question is which horse to ride.

Ethanol is not our answer to oil independence, but for those who say the Saudis are happy about ethanol, I suggest you have a doctor check you for a malignant case of ignorance.

Corn-based ethanol can be produced for about $1.10 a gallon, while gasoline is produced for about $1.69 a gallon. Corn would have to go to $4 a bushel and oil below $50 a barrel to reverse this, something that is unlikely. The numbers for cellulosic ethanol are going to be even better -- refer to the article I wrote about Xethanol on April 15. This is without the government tax subsidy. What is there to misunderstand?

The oft-quoted view that it costs more energy to produce ethanol than you create has been discredited by everyone in the scientific community. The only people who quote those numbers are the people who are now claiming ethanol is inefficient. The Department of Agriculture has stated that ethanol produces 67% more energy than what is used to create it.

The problem right now with ethanol is that it is adding about 20 to 30 cents per gallon to the cost of gasoline. This is due to the fact that our Congress refused to give protection to oil companies so that they could phase out MTBE, the additive in gasoline. This abrupt halt of MTBE caused a shortage of 2.2 billion gallons that was replaced with ethanol, which created shortages of ethanol and the price hikes.

To view John Layfield's video take of this column, click here.