In his State of the Union address, President Bush pleased some audience members by proposing to radically increase the amount of alternative fuel usage. Corn Belt congressional folks beamed and cheered their approval. So did their constituents, producers of ethanol, the biofuel expected to fill most of the gap created by lower gasoline consumption.
But despite the feel-good rhetoric of energy independence and a more environmentally friendly future, Wall Street remains skeptical. In the days preceding Bush’s speech, the shares of ethanol producers surged, but by Wednesday they headed down sharply, and continued the descent on Jan. 25
…the ethanol market is closely tied to the price of corn and oil. When oil prices are up, so is interest in energy alternatives such as ethanol. As UBS’ Shaw points out, the ethanol market faces a central paradox: Its success depends on high oil prices—which make alternative fuels more attractive—but its own success lowers demand for oil, which in turn trims oil prices.
That correlation explains why, in the near-term, the ethanol market is as volatile as crude oil prices. The past year’s performance proves the point. Three ethanol producers went public in 2006 and raised a combined $950 million from their offerings. As oil prices climbed and alternatives became more attractive, shares of a number of ethanol producers shot up midyear, but retreated in the second half.
[BusinessWeek]
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Sector Snap: Ethanol Loses Steam