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 ( XNL) 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 .
When pundits talk about the lower miles per gallon in ethanol they are correct. However it is E85 they are talking about, and either through ignorance or carelessness they imply that these numbers apply the same to the more prevalent blend of 10%. Summer driving season is upon us and when it is finished ethanol prices will retreat as demand decreases and supply increases. If we went to a 10% to 15% ethanol blend in every gallon of gasoline, we would reduce our foreign oil dependency by roughly 20% to 30%. That would be enough extra fuel to tell Iran and/or Venezuela that we choose not to do business with them. That to me is huge. Ethanol has to be trucked because it is too corrosive to be shipped in pipelines. So the key to investing in ethanol is knowing your market, because much more supply is coming online. California and New York consume almost 25% of the nation¿s ethanol, yet more than 90% of the ethannol is produced in the corn belt. Invest in companies that produce ethanol on the two coasts such as Xethanol and Pacific Ethanol ( PEIX - Get Report). There is obviously a huge demand for companies that produce ethanol in the Midwest such as Verasun ( VSE), Archer Daniels Midland ( ADM - Get Report), Aventine, and Hawkeye. But I believe this is where it will be tough sledding due to so much capacity coming online in the next few years. Now on to another renewable that is helping America reduce its dependence on foreign energy. Wind-generated electricity reached an inflection point last year when for the first time it became cheaper than electricity produced by coal and natural gas. Wind energy will become even cheaper over time; the opposite is true for coal- and natural gas-produced energy.
Right now you can produce wind-generated electricity at around 3.5 cents a kWh. This does not take into effect the production tax credit (PTC) of 1.9 cents a kWh, which virtually negates paying any federal tax for the first 10 years of the project. The PTC is set to expire in 2007; however, it has been set to expire before and I do not believe any politician will hurt renewable energy by canceling the PTC. The REC (renewable energy credit) market is another source of pure profit for the wind producers. RECs are bought by energy companies that do not have enough green energy, such as those in New York. A company in New York that is required to produce so much green energy can buy a REC from a wind farm to fulfill their obligation. RECs are currently worth around 2 cents a kWh. Add to all of this current standard local tax abatements of 40 to 60 cents and you have wind turbines in West Texas looking like the old wildcat days of oil. Wind energy is increasing so dramatically that the blade and gear boxes have a 24 to 30 month wait time. General Electric ( GE - Get Report) and FPL ( FPL - Get Report) have a huge presence in West Texas for good reason. The only place that is more of a sweet spot is North Dakota, but that state doesn¿t have the infrastructure to support a huge wind infrastructure. The only problem with investing in wind is that these companies are very far from being pure plays. The only pure play to me is Zoltek ( ZOLT), which manufactures the carbon fibers for applications in commercial products like blades for a wind turbine. Zoltek¿s stock took a recent hit due to the halting of certain turbines in the Midwest to see what impact the structures have on our air defense systems. I believe this will not be an issue as the U.K. dealt with that same thing a couple of years ago.
I visited with management this week for U.K.-based Ocean Power Tech ( OPWT.PK)and I believe wave power has huge future which I plan to write about next week. The world of renewable energy is not only exciting but a place to make a lot of money. Remember, being poor is bad, staying that way is stupid.