Ethanol and Biodiesel: fueling your pocketbook and your car
Craig Isakow, WG'08
Issue date: 2/19/07 Section: Insider
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In the latest State of the Union Address, President Bush called for 35 billion gallons of alternative fuels by 2017. This target would replace approximately 15% of the projected transportation fuel used that year with ethanol and biodiesel. Energy security, environmental impact, and farm interests all play a key role in driving a policy for increased use of biofuels. Imagine a time where dollars spent at the pump go to US farmers instead of the Middle Eastern oil barons, US energy security depended on US crop yields instead of unfriendly or unstable foreign governments, and cars burned biodegradable fuels instead of dirty fossil fuels. The venture capital, private equity, and energy industries are buzzing with excitement, investing billions of dollars into technologies and infrastructure to help reach that goal. But what is biofuel? What is the difference between ethanol and biodiesel? Is it really good for the environment? And perhaps most pertinent to Wharton Students, how can we make money?
Eric McAfee, founder of numerous biofuels companies with total market cap of over $2 billion, shared his views with the Wharton community as an entrepreneur-in-residence during a talk co-sponsored by Wharton's Entrepreneurship and Energy clubs on February 12th, 2007. His compelling business thesis: non-renewable sources of energy are non-renewable, and will therefore decrease over time; renewable energy sources are renewable, and they will increasingly make up a larger share of fuel over time. This simple fact, combined with government regulation, creates immense opportunities in the biofuels space. Government regulation in California already requires gasoline to be 5% ethanol. Mr. McAfee understood the opportunity, and built Pacific Ethanol (NASDAQ PEIX: $900 million market value), an ethanol supplier with $125 million in revenue. Mr. McAfee founded the company less than 3 years ago.
What are these fuels that are creating so much value for investors? When thinking about biofuels, it is easiest to think of it this way: ethanol replaces gasoline, biodiesel replaces diesel. Biofuels are not a new technology, Henry Ford's Model-T ran on ethanol, and the first diesel engine ran on peanut oil. Ethanol used to be produced in large quantities; we just called it moonshine. Manufacturers take a starch (in America, usually corn) turn it into sugar, add heat and yeast, and get the molecule ethanol (alcohol). Fuel suppliers mix ethanol with gasoline in low concentrations (E5 is 5% ethanol) and higher concentrations (E85 is 85% ethanol). In Brazil, they produce ethanol from sugar cane, a much more efficient and less expensive process. 80% of cars sold in Brazil are now "Flex Fuel", meaning they can run on either ethanol or traditional gasoline. Ethanol has replaced approximately 40% of the gasoline needed to run Brazilian cars. In the USA, approximately 5 billion gallons of ethanol are produced compared to a total of approximately 140 billion gallons of gasoline used. The government encourages production through legislation (for example replacing MBTE with ethanol) as well as through subsidies. Currently E10 fuel gets about 5.1cents gallon in tax credit, E85 gets about $1/gallon.
Eric McAfee, founder of numerous biofuels companies with total market cap of over $2 billion, shared his views with the Wharton community as an entrepreneur-in-residence during a talk co-sponsored by Wharton's Entrepreneurship and Energy clubs on February 12th, 2007. His compelling business thesis: non-renewable sources of energy are non-renewable, and will therefore decrease over time; renewable energy sources are renewable, and they will increasingly make up a larger share of fuel over time. This simple fact, combined with government regulation, creates immense opportunities in the biofuels space. Government regulation in California already requires gasoline to be 5% ethanol. Mr. McAfee understood the opportunity, and built Pacific Ethanol (NASDAQ PEIX: $900 million market value), an ethanol supplier with $125 million in revenue. Mr. McAfee founded the company less than 3 years ago.
What are these fuels that are creating so much value for investors? When thinking about biofuels, it is easiest to think of it this way: ethanol replaces gasoline, biodiesel replaces diesel. Biofuels are not a new technology, Henry Ford's Model-T ran on ethanol, and the first diesel engine ran on peanut oil. Ethanol used to be produced in large quantities; we just called it moonshine. Manufacturers take a starch (in America, usually corn) turn it into sugar, add heat and yeast, and get the molecule ethanol (alcohol). Fuel suppliers mix ethanol with gasoline in low concentrations (E5 is 5% ethanol) and higher concentrations (E85 is 85% ethanol). In Brazil, they produce ethanol from sugar cane, a much more efficient and less expensive process. 80% of cars sold in Brazil are now "Flex Fuel", meaning they can run on either ethanol or traditional gasoline. Ethanol has replaced approximately 40% of the gasoline needed to run Brazilian cars. In the USA, approximately 5 billion gallons of ethanol are produced compared to a total of approximately 140 billion gallons of gasoline used. The government encourages production through legislation (for example replacing MBTE with ethanol) as well as through subsidies. Currently E10 fuel gets about 5.1cents gallon in tax credit, E85 gets about $1/gallon.
Viewing Comments 1 - 3 of 3
yolanda m. holtzee
posted 2/20/07 @ 5:25 AM EST
Craig, if you have interest in pursuing a career in alternative energy, Goldman Sachs is NOT the place to do it, young man. They were lead underwriters last year for Xethanol (XNL:Amex). (Continued…)
Justin Schram
Justin Schram
posted 2/22/07 @ 12:07 PM EST
Thank you for the informative article, Craig. You point out the importance of government subsidies and fuel blend mandates in contributing to growth in this space. (Continued…)
David Bowes '00
posted 2/28/07 @ 7:11 PM EST
One thing we need to mention is that there is great controversy on whether biodiesel WILL replace diesel, what feedstocks we will obtain them from, where we get the methanol from (ethanol is looking a bit difficult to handle) and what the heck we will do with the tons and tons of waste products (glycerine, methanol, etc. (Continued…)
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