Tuesday, November 14, 2006

Signs of Change

I almost missed a major signal of the changing energy landscape. The new CEO of Archer Daniels Midland (ADM) has apparently argued that ethanol should not receive special treatment or preferences from governments, in competing with fossil fuels. This is a remarkable statement from a company that made one of the earliest and biggest bets on the sustained value of the US federal government's subsidies for manufacturing ethanol from corn, and that spent quite a bit of money over the years promoting their continuation. If you are still looking for a sign that alternative energy, and ethanol in particular, are becoming mainstream, look no farther. This comment also heralds the coming globalization of alternative energy. That could change the political dimension of biofuels dramatically, expanding it beyond the realm of domestic agriculture and into the minefield of international trade issues.

ADM is already one of the most successful alternative energy businesses in the country, perhaps the world, with the company's ethanol business segment contributing roughly a quarter of their 2006 before-tax profit of $1.9 billion. GE's combined "Ecomagination" package is probably larger in total, but it's spread across a broader range of technologies and businesses, not all of which are truly "alternative." In any case, ADM is by far the largest player in the US ethanol business, but with aspirations to be a global energy leader. That will require a different model.

So what does it mean when one of the largest beneficiaries of ethanol tax credits calls for a level playing field? It's one thing to hear this from Vinod Khosla, who has investments in both conventional and cellulosic ethanol, but quite another coming from ADM. It's certainly consistent with the view that Pat Woertz would have brought with her from her experience running Chevron's global refining and marketing business, but I think there's more to this than just a change at the top. Biofuels is going to be a major global industry, and the US isn't necessarily positioned, either by climate or labor and other input costs, to be the long-term global cost leader in biofuels production. There's no "organic ethanol" angle to leverage premium consumer preferences; as ethanol moves out of the small niche it has occupied, it will encounter the brutal realities of a global commodity business, from which decades of substantial government subsidies have insulated it.

Now, Ms. Woertz may not exactly be calling for an end to those subsidies, but in the long run, companies like ADM stand to gain from their elimination in combination with the end of the tariffs that keep Brazilian ethanol uncompetitive in most of the US market. Domestic ethanol will continue to enjoy a logistics advantage in much of the country, but increasing supplies of imported biofuels would help consumers on the coasts and give the industry greater incentives to push ahead with more efficient processes that use energy crops and waste, rather than grain, as their feedstock. The larger question is how this new notion of "equal footing" will mesh with the wave of populism and free-trade skepticism that contributed to last week's electoral triple play.

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