A simple economics lesson for Monday. Gas prices are rising so the following graph isn't surprising.
But the next one might be...
Here's a graph of ethanol prices over the last 18 months.
What's going on? CNNMoney has a partial explanation:
Everywhere you look these days, tech and business world luminaries - like Richard Branson, Paul Allen, Steve Case, Vinod Khosla, John Doerr, and Bill Gates - are laying down big bets on ethanol, a substitute for gasoline that's already finding its way into pumps.
The price of the stuff has shot up 65 percent since May from $2.65 a gallon to $4.50, largely thanks to the oil companies [ed note: It's always the oil companies' fault] who have started to put small quantities of it in our gas as a clean-air additive (most cars can handle a blend of up to 10 percent ethanol in their tanks).
That means the fuel for our cars is now about 60 cents a gallon more expensive than it would be if it were just gas, according to analysts at JPMorgan.
This is only part of the story. We're looking at the short-run effect. Assuming ethanol production is sustainable--a big assumption--what do we expect to happen to ethanol prices? In the short-run, technology is fixed--supply is fixed. As the demand for ethanol rises, the price of ethanol will rise also. But, investors are counting on ethanol production technology to eventually improve-- that is, the supply of ethanol is expected to increase. As the supply increases, prices fall. So we have two counter-balancing effects. Higher ethanol prices due to increased demand, and lower prices due to increasing supply. Right now, demand increases are outpacing supply increases and prices for ethanol and consequently gas/ethanol mixes are rising. Will that be the case in the long-run? We'll leave that up to the investors.
As drivers, ethanol is lightening our wallets; as investors, though, it could well fatten them.
But before you jump on the ethanol bandwagon, consider this: There is an ethanol format war looming that will make the Blu-Ray vs. HD-DVD tussle** look like a schoolyard spat. If you're making an investment for the long term, you have to ask yourself whether the future's dominant fuel is going to come from corn, sugar, rape seed, or switchgrass - or if it's going to be synthesized from scratch.
The winner is going to be whoever can make ethanol in mass quantities for as little money per gallon as possible - a tall order, no matter how you go about it.
**I'm in the process of putting a home theater in my basement--so I can watch "An Inconvenient Truth" in all it's HD glory when it comes out on DVD. Any advice on whether I should go with an HD-DVD player versus Blu-Ray would be appreciated.
