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Ethanol

Sigma Investment Counselors

October 11, 2019

Ethanol is a renewable, domestically produced alcohol fuel made from plant material, such as corn, sugar cane, or grasses.  In the U.S., corn is the primary source of ethanol, while other countries, particularly Brazil, use sugar cane.

Using ethanol can reduce oil dependence and greenhouse gas emissions.  Ethanol use in the U.S. has increased dramatically from about 1.7 billion gallons in 2001 to more than 14 billion gallons in 2016.  Recent increases in the allowable production of E15, gasoline blended with 15% ethanol, are expected to further increase the use of ethanol.

Whether this is a good idea is subject to considerable debate.  While farmers and ethanol producers are all in, the energy, environmental and consumer benefits are far from clear.

The crude oil glut has made ethanol unnecessary from an energy supply perspective.  The environmental benefits are far from clear, as a 2016 Yale study suggested that the production of corn-based ethanol generates as much carbon emissions as it saves by offsetting oil consumption.  Moreover, as ethanol blends get less gas mileage than non-blended fuel, drivers consume more gasoline to travel the same distances.

Finally, considering the world-wide hunger problem, it seems difficult to justify converting food into motor fuel.

All comments and suggestions are welcome.

Walter J. Kirchberger, CFA

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