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good article on ethanol, Brazil, US production. etc.

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  • blpasemann
    http://money.cnn.com/magazines/fortune/fortune_archive/2006/02/06/8367959/index.htm?cnn=yes How to Beat the High Cost of Gasoline. Forever! Stop dreaming about
    Message 1 of 1 , Jan 30, 2006
      http://money.cnn.com/magazines/fortune/fortune_archive/2006/02/06/8367959/index.htm?cnn=yes

      How to Beat the High Cost of Gasoline. Forever!
      Stop dreaming about hydrogen. Ethanol is the answer to the energy
      dilemma. It's clean and green and runs in today's cars. And in a
      generation, it could replace gas.
      Fortune Magazine
      By Adam Lashinsky and Nelson D. Schwartz
      January 24, 2006: 4:09 PM EST


      (FORTUNE Magazine) - You probably don't know it, but the answer to
      America's gasoline addiction could be under the hood of your car. More
      than five million Tauruses, Explorers, Stratuses, Suburbans, and other
      vehicles are already equipped with engines that can run on an energy
      source that costs less than gasoline, produces almost none of the
      emissions that cause global warming, and comes from the Midwest, not
      the Middle East.

      These lucky drivers need never pay for gasoline again--if only they
      could find this elusive fuel, called ethanol. Chemically, ethanol is
      identical to the grain alcohol you may have spiked the punch with in
      college. It also went into gasohol, that 1970s concoction that brings
      back memories of Jimmy Carter in a cardigan and outrageous subsidies
      from Washington. But while the chemistry is the same, the economics,
      technology, and politics of ethanol are profoundly different.
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      Instead of coming exclusively from corn or sugar cane as it has up to
      now, thanks to biotech breakthroughs, the fuel can be made out of
      everything from prairie switchgrass and wood chips to corn husks and
      other agricultural waste. This biomass-derived fuel is known as
      cellulosic ethanol. Whatever the source, burning ethanol instead of
      gasoline reduces carbon emissions by more than 80% while eliminating
      entirely the release of acid-rain-causing sulfur dioxide. Even the
      cautious Department of Energy predicts that ethanol could put a 30%
      dent in America's gasoline consumption by 2030.

      We may not have to wait that long. After decades of being merely an
      additive to gasoline, ethanol suddenly looks to be the stuff of a fuel
      revolution--and a pipe dream for futurists. An unlikely alliance of
      venture capitalists, Wall Streeters, automakers, environmentalists,
      farmers, and, yes, politicians is doing more than just talk about
      ethanol's potential. They're putting real money into biorefineries,
      car engines that switch effortlessly between gasoline and biofuels,
      and R&D to churn out ethanol more cheaply. (By the way, the reason
      motorists don't know about the five-million-plus ethanol-ready cars
      and trucks on the road is that until now Detroit never felt the need
      to tell them. Automakers quietly added the flex-fuel feature to get a
      break from fuel-economy standards.)

      What's more, powerful political lobbies in Washington that never used
      to concern themselves with botanical affairs are suddenly focusing on
      ethanol. "Energy dependence is America's economic, environmental, and
      security Achilles' heel," says Nathanael Greene of the Natural
      Resources Defense Council, a mainstream environmental group. National-
      security hawks agree. Says former CIA chief James Woolsey: "We've got
      a coalition of tree huggers, do-gooders, sodbusters, hawks, and
      evangelicals." (Yes, he did say "evangelicals"--some have found common
      ground with greens in the notion of environmental stewardship.)

      The next five years could see ethanol go from a mere sliver of the
      fuel pie to a major energy solution in a world where the cost of
      relying on a finite supply of oil is way too high. As that happens,
      says Vinod Khosla, a Silicon Valley venture capitalist who has become
      one of the nation's most influential ethanol advocates, "I'm
      absolutely convinced that without putting any more land under
      agriculture and without changing our food production, we can introduce
      enough ethanol in the U.S. to replace the majority of our petroleum
      use in cars and light trucks."

      Filling up on ethanol isn't new. Henry Ford's Model Ts ran on it.
      What's changing is the cost of distilling ethanol and the advantages
      it brings over rival fuels. Energy visionaries like to dream about
      hydrogen as the ultimate replacement for fossil fuels, but switching
      to it would mean a trillion-dollar upheaval--for new production and
      distribution systems, new fuel stations, and new cars. Not so with
      ethanol--today's gas stations can handle the most common mixture of
      85% ethanol and 15% gasoline, called E85, with minimal retrofitting.
      It takes about 30% more ethanol than gasoline to drive a mile, and the
      stuff is more corrosive, but building a car that's E85-ready adds only
      about $200 to the cost. Ethanol has already transformed one major
      economy: In Brazil nearly three-quarters of new cars can burn either
      ethanol or gasoline, whichever happens to be cheaper at the pump, and
      the nation has weaned itself off imported oil.

      And have you heard about GM's yellow gas caps? In the next few weeks
      the auto giant is set to unveil an unlikely marketing campaign drawing
      attention to E85 and its E85-ready cars and trucks like the Chevy
      Avalanche. They will sport special yellow gas caps, and if you already
      own such a vehicle, GM will send you a gas cap free. California
      governor and Hummer owner Arnold Schwarzenegger is backing a ballot
      initiative that would encourage service stations to offer ethanol at
      the pump. Even big oil companies like Royal Dutch Shell and Exxon
      Mobil are funding ethanol research. Says Beth Lowry, GM's vice
      president for energy and environment: "People's perception used to be
      'The agricultural lobby is very interested in it.' Now people are
      waking up and saying, 'This isn't just about the Midwest. This is
      about the U.S. as a whole.' " Adds Daniel Yergin, one of the country's
      top energy experts: "I don't think I've seen so many kinds of
      renewable energy fermenting and bubbling as right now. The very
      definition of oil is broadening."

      Not that ethanol will replace gasoline overnight. There are 170,000
      service stations in the U.S.; only 587 (count 'em!) sell E85. To
      refine enough ethanol to replace the gas we burn (140 billion gallons
      a year) would require thousands of biorefineries and hundreds of
      billions of dollars. Yet one of capitalism's favorite visionaries is
      convinced that very soon filling up on weeds and cornhusks will be no
      more remarkable than tanking up on regular. Says Richard Branson,
      whose Virgin Group is starting an ethanol-inspired subsidiary called
      Virgin Fuels: "This is the win-win fuel of the future."

      BARRELS FROM BUSHELS

      In Decatur, Ill., nobody is waiting around for the future; demand for
      ethanol from corn is booming right now. This grain-elevator-dotted
      town is home to agribusiness giant Archer Daniels Midland, which makes
      it the capital of the old-school heavily subsidized U.S. ethanol
      industry. On a blustery January day, the air is thick with fog, sleet,
      and condensation from the corn mills on the 600-acre complex next to
      ADM's corporate office. Outside the ethanol plant, the air smells like
      grape juice gone bad. Inside, with its giant vats and fermentation
      towers, the biorefinery resembles a winery, but it's much noisier.

      ADM used to call itself "Supermarket to the World." Today, reflecting
      its emergence as an alternative-energy supplier, it boasts of being
      "Resourceful by Nature." The company created the corn-ethanol industry
      when Jimmy Carter asked it to in 1978--the oil-shocked President
      wanted a homegrown alternative to gasoline. ADM now pumps out more
      than a billion gallons of ethanol per year. While the fuel accounts
      for just 5% of the company's $36 billion in annual sales, analysts
      estimate that it generates 23% of ADM's operating profit. Says Allen
      Andreas, the courtly 62-year-old CEO: "We've always been feeding
      people and looking for better alternatives; now we're doing the same
      thing in energy."

      ADM aims to be a big player in what Andreas calls the shift "from
      hydrocarbons to carbohydrates." But for now it's ignoring E85 and
      cellulosic ethanol in favor of keeping pace with demand that is
      already booming. Corn ethanol's main use is as an additive that helps
      gasoline burn more efficiently. ADM sells nearly its entire output to
      oil companies, which use ethanol as a substitute for MTBE, a
      petroleum-based additive that is toxic and is now banned in California
      and 24 other states. With two billion gallons of MTBE still in use
      annually and 25 states that have yet to ban it, the ethanol industry
      could grow 50% simply by replacing MTBE.

      In September, ADM announced a nearly 50% expansion project, or 500
      million new gallons of annual production capacity. Archrival Cargill
      is belatedly ramping up ethanol production, and new entrants are using
      private capital to build ethanol plants. The only publicly traded
      pure-play ethanol maker, Pacific Ethanol of Fresno, plans to build
      five plants in California and has raised a total of $111 million,
      including $84 million from Bill Gates. (For a guide to playing the
      ethanol boom, see Investing.) All told, the planned projects represent
      a nearly $2.6 billion investment and will increase U.S. ethanol
      capacity by 40%.

      Other major players are making long-term ethanol bets. Ford is working
      with VeraSun, a startup in South Dakota, to promote E85 fueling
      stations. Shell is the primary backer of Canada's Iogen, which is
      attempting the first large-scale production of cellulosic ethanol--the
      kind made from cornstalks and grasses--at a pilot plant in Ottawa (see
      following story, "Biorefinery Breakthrough"). Exxon Mobil has pledged
      $100 million to Stanford University for research into alternative
      fuels. The oil giant's new CEO, Rex Tillerson, visited the campus last
      year to hear what researchers are cooking up. Biology professor Chris
      Sommerville says the change in the industry is palpable: "I went to
      six scientific conferences on biofuels last year; the previous 29
      years I didn't go to any."

      The biggest alternative-fuels player of all, of course, is Uncle Sam.
      Oil refiners receive a 51-cent tax credit for every gallon of ethanol
      they blend into their gasoline. That alone will cost taxpayers more
      than $7 billion over five years, estimates the Congressional Budget
      Office. The U.S. has also funded research into biodiesel, which uses
      deep-fryer grease and other nontoxic ingredients to replace regular
      diesel fuel. (See box at left.) But ethanol will never really take off
      unless consumers demand it, and while the U.S. industry still relies
      on taxpayer largesse, Brazil has leaped to the next step: a profitable
      free-market system in which the government has gotten out of the way.

      HOW BRAZIL BEATS THE U.S.

      Near the prosperous farm town of Sertãozinho, some 200 miles north of
      São Paulo, the fuel that will fill the tanks of nearly three million
      Brazilian cars in a few months is still waist-high. Lush sugar-cane
      fields stretch as far as the eye can see, interrupted only by the
      towering white mills where the stalks of the plants will be turned
      into ethanol when the harvest begins in March.

      Brazil boasts the biggest economy south of Mexico, and with annual GDP
      growth of 2.6%, it is a powerhouse you might expect to consume growing
      amounts of oil, coal, and nuclear energy. But Brazil also happens to
      have the perfect geography for growing sugar cane, the most
      energy-rich ethanol feedstock known to science. And so, for Brazil's
      16.5 million drivers, there is ready access to what's known in
      Portuguese as álcool at nearly all of the country's 34,000 gas
      stations. "Everyone talks about alternative fuels, but we're doing
      it," says Barry Engle, president of Ford Brazil. Ethanol accounts for
      more than 40% of the fuel Brazilians use in their cars.

      While oil frequently has to be shipped halfway around the world before
      it's refined into gasoline, here the sugar cane grows right up to the
      gates of Sertãozinho's Santa Elisa mill, where it will be made into
      ethanol. There's very little waste--leftovers are burned to produce
      electricity for Santa Elisa and the local electrical grid. "The
      maximum distance from farm to mill is about 25 miles," says Fernando
      Ribeiro, secretary general of Unica, the trade association that
      represents Brazilian sugar-cane growers. "It's very, very efficient in
      terms of energy use."

      Although Brazilians have driven some cars that run exclusively on
      ethanol since 1979, the introduction three years ago of new engines
      that let drivers switch between ethanol and gasoline has transformed
      what was once an economic niche into the planet's leading example of
      renewable fuels. Ford exhibited the first prototype of what came to be
      known as a flex-fuel engine in 2002; soon VW marketed a flex-fuel car.
      Ford's Engle says flex-fuel technology helps avoid problems that had
      plagued ethanol cars, such as balky starts on cold mornings, weak
      pickup, and corrosion.

      Consumers loved flex-fuel because it meant not having to choose
      between ethanol and gas models--memories were still fresh of the 1990
      sugar-cane shortage, when ethanol-car owners found themselves, well,
      out of gas. Today "nobody would buy an alcohol-only car, even with tax
      incentives," says sales manager Rogerio Beraldo of Green Automoveis, a
      sprawling dealership in São Paulo. "Brazilians are traumatized by our
      earlier experience, when supplies ran out. But with flex-fuel, there's
      no risk of that."

      With Brazilian ethanol selling for 45% less per liter than gasoline in
      2003 and 2004, flex-fuel cars caught on like iPods. In 2003, flex-fuel
      had 6% of the market for Brazilian-made cars, and automakers were
      expecting the technology's share to zoom to 30% in 2005. That proved
      wildly conservative: As of last December, 73% of cars sold in Brazil
      came with flex-fuel engines. There are now 1.3 million flex-fuel cars
      on the road. "I have never seen an automotive technology with that
      fast an adoption rate," says Engle.

      Ethanol's rise has had far-reaching effects on the economy. Not only
      does Brazil no longer have to import oil but an estimated $69 billion
      that would have gone to the Middle East or elsewhere has stayed in the
      country and is revitalizing once-depressed rural areas. More than 250
      mills have sprouted in southeastern Brazil, and another 50 are under
      construction, at a cost of about $100 million each. Driving to lunch
      at his local churrasco barbecue spot in Sertãozinho, the head of the
      local sugar-cane growers' association points to one new business after
      another, from farm-equipment sellers to builders of boilers and other
      gear for the nearby mills. "My family has been in this business for 30
      years, and this is the best it's been," says Manoel Carlos Ortolan.
      "There's even nouveaux riches."

      The key to Brazil's success is that consumers are choosing ethanol
      rather than being forced to buy it. Brazil's military dictators tried
      the latter approach in the 1970s and early 1980s, by offering tax
      breaks to build mills, ordering state-owned oil company Petrobras to
      sell ethanol at gas stations, and regulating prices at the pump. This
      bullying--and cheap oil in the 1990s--nearly killed the market for
      ethanol until flex-fuel came along. The regime wasn't good for much,
      says consultant Plinio Nastari, but it did create the distribution
      system that enables drivers to fill up on ethanol just about anywhere.

      Even though the U.S. will never be a sugar-cane powerhouse like
      Brazil, investors now view Rio as the future of fuel. "I hate to see
      the U.S. ten years behind Brazil, but that's probably about where we
      are," says one shrewd American freethinker, Ted Turner.

      ETHANOL FINDS A GODFATHER

      There are venture capitalists, and then there's Vinod Khosla. A
      co-founder of Sun Microsystems and a partner at Kleiner Perkins, he
      was an early backer of Juniper Networks, whose technology helped end
      decades of dominance by traditional telecom manufacturers. A lean,
      50-year-old native of India, Khosla says, without a hint of modesty,
      "I love the challenge of breaking monopolies."

      Frustrated that Kleiner Perkins wasn't taking enough risks after the
      dot-com crash, Khosla opted out of Kleiner's most recent fund and
      started his own group, Khosla Ventures. He'd been dabbling in
      environmentalism but never expected to become an investor. Brazil's
      success, however, made him wonder about ethanol's U.S. potential. "I
      spent two years trying to convince myself that this was never going to
      be more than another minor alternative fuel," he says. "What I
      discovered was that ethanol might completely replace petroleum in this
      country. And a lot of countries. This was a great shock to me."

      Pretty soon Khosla was surprising plenty of others. He put together a
      PowerPoint presentation, "Biofuels: Think Outside the Barrel," which
      he fires up on a moment's notice. He has made the pitch on ethanol to
      the President's Council of Advisors on Science and Technology and
      elsewhere in the White House. He is also behind California's upcoming
      ballot initiative to fund a subsidy for gasoline retailers that add
      E85 fuel pumps. "Getting distribution going is the real problem," says
      Khosla. "We need to increase blending and then introduce E85 pumps,
      and the possible will become the probable."

      His conversion to energy investing is part of a Silicon Valley trend,
      as VCs seek the rapid growth and giant markets that computers once
      offered. VantagePoint Venture Partners in San Bruno, for instance,
      established a fund called New Energy Capital that invests in ethanol,
      wind power, and other energy projects. Nth Power, a San Francisco
      energy-investment firm, estimates that $700 million of the $21 billion
      flowing into venture funds last year were earmarked for "clean
      technology" startups.

      CELLULOSE NIRVANA

      No one, not even a professionally optimistic VC, thinks we're anywhere
      near getting rid of gasoline. The oil superstructure is simply too
      efficient and too entrenched to just go away. Nor could corn ethanol
      generate enough fuel to run America's cars, pickups, and SUVs. Already
      ethanol gobbles up 14% of the country's corn production. Converting a
      bigger share into fuel would pinch the world's food supply--a favorite
      objection of skeptics. Critics also contend that producing fuel from
      crops consumes more energy than it yields. On this topic of endless
      Internet bickering, the Energy Department recently reported, "In terms
      of key energy and environmental benefits, cornstarch ethanol comes out
      clearly ahead of petroleum-based fuels, and tomorrow's
      cellulosic-based ethanol would do even better."

      Because cellulosic ethanol comes from cornstalks, grasses, tree
      bark--fibrous stuff that humans can't digest--it doesn't threaten the
      food supply at all. Cellulose is the carbohydrate that makes up the
      walls of plant cells. Researchers have figured out how to unlock the
      energy in such biomass by devising enzymes that convert cellulose into
      simpler sugars. Cellulose is abundant; ethanol from it is clean and
      can power an engine as effectively as gasoline. Plus, you don't have
      to reinvent cars. Ratcheting up production of cellulosic ethanol,
      however, is a gnarly engineering problem.

      The onus now is on companies like Genencor, a Palo Alto biotech. Its
      biological enzymes are used to break down stains in Tide detergent and
      achieve just the right distressed look in blue jeans. But making
      underpants whiter and denim bluer is nothing compared with breaking
      America's longstanding addiction to gasoline. The best way to do this
      would be to bring down the cost of ethanol to the point where
      consumers clamor for it. Before flex-fuel engines came along,
      Brazilians would mix their own rabo de galo (cocktail) of ethanol and
      gasoline when filling up, simply because it was cheaper than straight
      gas. Genencor says its enzymes have cut the cost of making a gallon of
      cellulosic ethanol from $5 five years ago to 20 cents today. Now
      refiners have to learn how to scale up production. Canada's Iogen is
      the furthest along in commercialization; another hopeful is BC
      International, a Dedham, Mass., company that's building a cellulosic
      ethanol plant in Louisiana.

      There's still a role for government--and we don't mean more handouts
      for corn growers or distillers. The recently enacted energy bill takes
      steps in the right direction, like mandating the use of 250 million
      gallons of cellulosic ethanol a year by 2013, but much more can be
      done. Easing the tariff of 54 cents per gallon on imports of ethanol
      from Brazil and other countries would certainly help. Because sugar
      cane generates far more ethanol per acre than corn, Brazil can produce
      ethanol more cheaply than the U.S. Not only would importing more of it
      broaden access to ethanol for U.S. buyers, but it would also make it
      cheaper for the ultimate consumers--us. That in turn would spur demand
      at the pump and encourage service station owners to offer ethanol more
      widely. What's also needed is for someone big--like Shell or BP, which
      tout themselves as green companies--to commit to cellulosic ethanol on
      a commercial scale. Shell's bet on Iogen is minuscule compared with
      the $20 billion it plans to spend on producing oil and gas off
      Russia's Sakhalin Island.

      Of course, the timing of when ethanol goes from dream to reality isn't
      just a matter of an investment here or a subsidy there. It took
      decades of ferment in Brazil before serendipity in the form of high
      gas prices and flex-fuel engines made ethanol an everyday choice for
      consumers. But the sooner we start, the greater our ability to shape a
      future that's not centered on increasingly expensive oil and gas. It's
      not as if gasoline demand is going to go down: As long as the Chinese
      and the Indians want our lifestyle--and they do--you can forget about
      oil at $10 or even $20 a barrel. Whatever the technological
      challenges, a world of abundant, clean ethanol is suddenly looking a
      lot more realistic than a return to the days of cheap, inexhaustible oil.
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