Ethanol Fuel Boom - How can you profit?

This week’s Business Week has an interesting article about the Ethanol-based fuel boom and how it is affecting the world economy. I had heard through other sources about the limitations and drawbacks of shifting to a more ethanol based fuel supply, but hadn’t thought of all the ramifications.

According to the Business Week article, the ethanol fuel industry is booming. Ethanol fuel is derived from organic sources such as corn, sugar cane, wheat, etc. It offers great promise in reducing reliance on the world’s dwindling oil supplies and is also considerably less polluting than unleaded gasoline due to its lower carbon monoxide output.

Unfortunately, the booming demand for ethanol fuel is having negative effects on many parts of the world. The Business Week article cites southeast Asia as one of the hardest hit regions. Forests are being razed in order to build ethanol processing facilities. Many countries, unable to compete in the world energy market due to lack of natural resources immediately see an opportunity to get a piece of the lucrative industry by using their crops to produce and sell energy on the world markets. In addition to its environmental impacts, the ethanol fuel boom is causing a few other undesirable effects. The cost of a bushel of corn in the US has doubled from two to four dollars per bushel in the last few years. This has increased the cost of feed for livestock which will eventually, if it hasn’t already done so, hit the consumer in the form of higher costs at the supermarket. If the demand for ethanol continues, the cost of corn, sugar, and other basic necessities may rise to the point where energy demand by the first world is competing with food demand of the third world. Automobile drivers in the US, Europe, South America, Asia, and the Middle East may simply be willing to pay more for the crops in the form of fuel than the third world can afford to pay for them in the form of basic sustenance.

The other troubling issue I see that went unmentioned in the Business Week article was the possibility of over supply. Many smaller countries around the world are destroying their forests, arguably one of their greatest natural resources, to build ethanol processing facilities and increase available farmland. If this trend continues, its possible that overproduction of the crops could occur, causing prices to fall and those countries in the more outlying areas to not be able to find a strong enough market for their ethanol fuel.

Looking at it from an investment standpoint, what can one do to profit from the ethanol fuel boom? One could certainly try to buy contracts on the underlying commodities, though that is risky, complicated and volatile. One could try to short the cost of oil, though that as well is risky and highly impacted by other factors (OPEC, global conflict, etc). It seems as though the best ideas may be to locate the companies that make the products for the ethanol production facilities or the make the products required to build out the ethanol delivery systems across the world in the form of supply lines, fuel pumps, auto parts, etc. The facilities will undoubtedly continue to be built at a rapid rate for at least the next several years, and the technology required to build out the infrastructure and retrofit the existing vehicles to run on a richer ethanol fuel mix will likely be in strong demand as well.

The alternative fuel industry is booming and finding ways to profit off the growth could be a very lucrative investment opportunity over the coming years. I encourage you to read about ethanol fuel, find investment opportunities in this area, and let me know what you think are the brightest prospects.

Other resources:
Business Week Article
Wikipedia page on ethanol fuel