Gifts Under $25 iPhone Emergency SOS Saves Man Twitter Suspends Kanye MyHeritage 'Time Machine' Guardians of the Galaxy 3 Trailer White Bald Eagle Indiana Jones 5 Trailer Black Hole's 1,000 Trillion Suns
Want CNET to notify you of price drops and the latest stories?
No, thank you

Boxed in: America's new energy trap

Michael Butler and Randy Shefman say miscalculations have temporarily boxed us in and led the U.S. off the path to energy self-sufficiency.

The dawn of the "new-energy economy" was accompanied by a host of sunny assumptions three years ago.

One of the most promising premises was that a substantial portion of our petroleum-based transportation fuel would eventually be replaced by ethanol and other biofuels. That hypothesis may prove true someday. But even with oil surging to nearly $100 a barrel, soy beans selling at $9 a bushel, and corn rising to just under $4 a bushel, the financial projections of 2005 have failed to materialize and the highly touted post-petroleum era remains on hold--at least for now.

Indeed, the nearly 45 percent returns that ethanol investors generated only a few years ago, when oil was $60 a barrel, are no longer available--even though oil prices have nearly doubled. Why? Because the demand for ethanol has yet to catch up with production that is presently online or soon to come online.

Despite the current oversupply, we remain confident that America can work its way out of this new energy trap--and sooner rather than later. Our optimism is based on a steady stream of world-class R&D and innovation that's focused on all forms of renewable fuel production. Our hope is predicated on the ability of forward-thinking executives and entrepreneurs to reconsider and restructure existing business models so they incorporate the lessons we've learned over the past three years.

Looking back, we can now point to three miscalculations that have temporarily boxed us in and led us off the path to energy self-sufficiency.

First, we underestimated the economic impact and market disruption that development of alternative fuels would have on traditional commodity markets, particularly on corn, the primary feedstock for ethanol production in the United States. It's no secret now that corn, which is a substantial part of both our food and animal feed markets, is price sensitive. However, very few in the industry foresaw the price volatility that has accompanied the use of corn for biofuels production. Producers, looking for both debt and equity investment in their projects, need to lock in long-term commodity pricing at reasonable rates; but they are finding it difficult to operate in a market where corn is trading at $3.70 to $4 a bushel and futures are pointing still higher.

The good news here is that high prices will have a positive effect on the same metrics, because farmers are committing more and more acreage to corn, both as a fuel crop and food source. Over time, rational market forces should help bring down commodity prices and smooth some of the bumps in the market that have created the current environment of uncertainty.

Second, we neglected to factor in the increased cost of transporting commodity feedstocks to the plants that make fuel as well as the cost of bringing the finished product to the blending market. Most of this cargo is moved by rail. The cost of train trips from the corn fields of the Midwest to our national refining centers, where ethanol is blended with gasoline, have increased markedly, for example, and have a significant effect on business models and the bottom line.

Many in the industry are now focused on new paradigms and sources of feedstock that are located closer to our refining markets as a way of defraying these transportation costs. Others are looking at feedstocks that are more easily, and therefore more affordably, movable.

Understanding demand for alternative fuels
Third, as mentioned above, we overestimated the current demand for ethanol as well as the industry's ability to encourage demand by bringing blended products to the consumer.

While the latest ethanol boom was driven by the need to replace MTBE as a gasoline oxygenate and the blending requirements promulgated by the Renewable Fuel Standard set out in the Energy Policy Act of 2005, many investors expected these early drivers to be augmented by increasing consumer demand for ethanol in higher concentrations, such as E85--a mixture that contains 85 percent denatured fuel ethanol and 15 percent gasoline.

While we firmly believe that the public will embrace flex-fuel vehicles that run on these higher ratios as one of several alternative fuel options, our infrastructure for supplying pure consumer demand is currently lagging. We simply do not have enough flexible-fuel vehicles on the roads today to make a significant impact on the ethanol markets. And, even if we did, there are not enough E85 pumps in our larger metropolitan areas to meet an increased demand for the higher blend.

There is a bright spot here, however, because investors and governments have clearly recognized the need to build a renewable fuel infrastructure at the local level. If these initiatives prove successful, we would expect consumer demand to assume its rightful role as market driver.

One of the reasons we're sanguine about the future of alternative fuels is that the ethanol experience has taught us some good lessons. Indeed, we've proved to be very agile in shifting our focus to sources of fuel that will help overcome the commodity and transportation issues that have hampered the growth of the industry to this point.

Literally billions of investment dollars are going into R&D for cellulosic ethanol from all manner of cheaply--even freely--available sources that do not compete with our food and animal feed industries; these approaches also help solve real problems, such as landfill crowding, forest fire dangers, and the sequestration of emissions, like carbon dioxide, that cause global warming. Many of these technologies can and are being adapted to fit in with our existing ethanol infrastructure so that current facilities will not need to be scrapped in order for the industry to produce the next generation of renewable fuels.

The new possibilities don't stop with raw materials. Demand-side drivers are also at work. A number of investors are focusing on alternate sources of vehicular power. The evolution of battery technology--from lead acid to nickel cadmium to nickel-metal hydride--has recently received a boost from lateral advances in nanotechnology that will enable advancements in hybrid vehicles. Combining the energy storage capabilities of these new batteries with hybrid engines that efficiently burn alternative fuels will help the fresh fleets of energy-efficient hybrids and electric cars that are poised to hit the road simply get out of neutral.

As we work our way back in the wake of our early stumbles in alternative energy, it's clear that this market will be guided--in much the same way as health care--by significant regulation and public policy initiatives. It's essential, therefore, that sustainable technology investors and government officials continue to find ways to work closely together to achieve common goals.

With policy makers in Washington increasingly looking to sustainable technology as a way of addressing climate change and energy security concerns, it seems that now is the right time to increase the influx of public monies into early-stage sustainable technology research, which is already under way at a host of private companies.

As always, the debate will be about whether the government is funding basic sustainable technology research or pre-annointing industry winners. However, in working with policy makers, we are encouraged by a number of forward-thinking initiatives that recognize the need for a host of alternative solutions to our fuel, energy, and environmental needs; we also expect that our leading universities and national laboratories will play a significant part in the development of new technologies as a partner with industry.

Despite the stumbles and incorrect assumptions that have hampered renewable fuel production in the United States, we believe that we can escape our current energy trap, head toward meaningful energy self sufficiency, and enhance our country's national, financial, and environmental security in meaningful ways.