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Ethanol Producing Companies as Stock Investments

May 9, 2008
There have been numerous initiatives by companies to develop the potential of different alternatives to crude oil such as natural gas and ethanol. In the bid for the world's search for alternative sources of energy ethanol has played a prominent role. Given the supply and demand factors of crude oil, time is running out to develop suitable alternative energy sources.

Ethanol is a colorless, clear liquid with an agreeable odor. This is the natural component of ethyl alcohol. Corn, wheat, potatoes, sugar cane, and other plants can produce starch that is made into ethanol by the process of fermentation. It can be used as fuel by mixing it with the regular gasoline and this becomes gasohol.

These sources of alternative fuels are currently one of the faces of future technologies that are being developed and researched by many technology energy companies listed on stock market exchanges. These technology companies have been popular picks of long-term technology savvy investors for more than 5 years.

The potential of ethanol has been the focus of a lot of technology companies in stock exchanges, most commonly those listed on the NASDAQ stock exchange. The popularity of this resource as a future alternative to fossil fuels has been recognized in the stock market and numerous initiatives for research and development to make this a renewable source of energy has been ongoing for quite some time.

Although investment performance returns from these alternative energy companies may not be as competitive as established companies that are currently in the business of the popular fossil fuels, the technology for these alternative fuel companies is still being developed. Putting in place the large amount of necessary infrastructure to produce and distribute alternative sources of fuel like ethanol will take quite some time.

Investors who are optimistic on the future of these alternative energy companies believe that the technology just requires longer waiting. Even with new production discoveries the infrastructure and distribution of energy products produced from alternative energy sources like ethanol will probably still be more costly than energy produced in other ways like coal or hydro electric power.

Ethanol will also not necessarily be competitive at its initial stages of introduction. Stock market investors should consider that alternative energy producing companies will be competing with the established production and distribution processes of companies producing fossil fuel energy products.

While the wait for the availability of alternative energy sources to the public may still be long and initially costly, the world will have to push forward the development of alternative energy sources as the world reserves of fossil fuels are depleting. Sooner or later alternative sources of energy will have to be much more of a priority not only of companies engaged in their development but also of the general public as well.

A major flaw in the USA on relying on ethanol to replace gasoline in a meaningful way as an energy source is that ethanol requires more energy inputs to produce it than the energy that it eventually produces. In the USA Ethanol is generally produced from corn. Corn requires a lot of work and energy inputs to produce. For one thing those huge tractors and harvesting machines burn a lot of fuel. The entire process is grossly inefficient.

The use of corn to produce Ethanol in the USA is a terribly misguided program as it has created a scarcity of corn that can be delivered to the food chain including humans. This has resulted in high prices for not only corn but for food chain animals that rely on corn as a feed grain, such as hogs, cattle, and chickens.

Farmers have also diverted land from the production of other commodities, such as soybeans and cotton, in order to increase corn production and this has lead to high prices for these crops. So the production of ethanol has contributed to food price inflation.

The thinking that ethanol can somehow save the USA from dependence upon imported oil as an energy source is fatally flawed. Therefore stock market investors who invest in ethanol producing companies are likely to be disappointed in performance, and in fact if they purchased stock near the top in the run up in prices, will probably eventually have to face up to heavy losses in the stocks of these companies.
About the Author
Gerald "Taipan" Greene is the pen name used by a retired forex trader and portfolio manager who worked in Asia for over 20 years. The nickname was acquired in Hong Kong and is now used for a number of financial related blogs. One of them is at Stock Trading Pro
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