mathoda.com

My friend Tommy Mullins pointed out in response to my last post that Consumer Reports magazine’s latest issue rips ethanol, for the general perception that it’s cheaper and more efficient than gas, which Consumer Reports states is not true on either count.

I agree with Consumer Reports on this point, as long as they are talking about the current state of ethanol creation and combustion technology, and the current level of gas prices. Ethanol is currently not cheaper then gas when it gets to the pump, and it will actually reduce the miles per gallon your car will get even if it is specially designed for ethanol consumption. However, Consumer Reports isn’t good at judging is the promise of ethanol, because they don’t have the core competence to judge the state of technology development for ethanol, or future gas prices. Actually, no one can do either with infallibility. The best solution is to let the marketplace and all the various participants in the marketplace sort it out.

I’m not in favor of subsidizing ethanol, although I am in favor of having gas prices reflect the cost of funding the US military to the extent such funding is used to protect oil’s extraction from unstable countries. While ethanol isn’t more efficient then gas at the current state of ethanol technology and at current gas prices, it is notable that Brazil does use it to power a large part of their economy, so the difference in cost isn’t massive. The relative efficiency of ethanol vs gas depends a lot on what gas prices are at, and where the state of ethanol technology is at.

Ethanol probably won’t be as good as gas, for what gas does, for some time. This is true of many immature technologies.  Immature products (3.5″ hard drives) are often not as good as older products (5.25″ hard drives) on a particular metric (storage per dollar) for a very long time, but they succeed by finding alternate markets that value what they are good at (laptops) and then eventually overtake the main technology once they scale. This was pointed out by Clayton Christensen’s book The Innovator’s Dilemma.

From what I understand, corn based ethanol isn’t that cost effective (although it brings national security advantages), but switchblade grass ethanol is much better. People are trying all kinds of techniques to make ethanol more efficient, such as genetically modifying the plants that are used to create the ethanol or Honda’s technique of breaking down cellulose. People are also trying to make the gas economy more efficient. It does strike me that ethanol is immature technologically and has a lot of room to improve.

I would also point out that ethanol is not without environmental cost. Extraction of oil can actually have very little environmental impact on the extraction side, particularly with modern drilling techniques.  The burning of oil does have an impact, as we all know.

In contrast, ethanol can have significant environmental impact when being created (taking nutrients from the soil on its extraction, replacing other species of plants), and it still has environmental costs when burned.

Ethanol’s key advantages for the US is really that the future state of ethanol technology may make it significantly cheaper than oil, and that ethanol can be produced without dependency on foreign nations (although I am in favor of importing Ethanol from abroad if it can be produced more cheaply abroad).

Vinod Khosla, cofounder of Sun Microsystems and one of the most successful VC’s of all time, has a lot of enthusiasm for ethanol, and has considered many of the issues with it:

http://video.google.com/videoplay?docid=-570288889128950913&q=type%3Agoogle+vinod+khosla