As mentioned in several posts, the Ethanol Industry faces intense competition from the Petroleum Industry in the form of steep barriers to entry for fuel-distribution to end-consumers. The majority of automotive fuel is distributed by franchised stations, and those franchises have their own specific guidelines on how to, if allowed, sell ethanol. Without points of distribution, all of the investments in the ethanol industry are worthless. The WSJ commented on this extensively in yesterday’s, “Fill Up With Ethanol? One Obstacle is Big Oil”.
The ethanol industry is missing the last piece to establish some kind of market dominance:
There are a couple strategies that can complete the ethanol puzzle:
Wal-Mart Has Many Available Points of Distribution for Ethanol
Supply chain management is crucial to the profitability and market penetration of any product. Wal-Mart has perfected this system and has what most investors consider the greatest buying power of any company in the world. This fascinating example of brute-force capitalism is found in just about every town in America. Using their national footprint of 3,289 stores, ethanol could get a big boost in direct-consumer delivery. The distribution to the consumer isn’t the only benefit to this arrangement; Wal-Mart also boasts one of the best logistics systems in the world for inventory management. Ethanol demand could be accurately forecasted and met, ensuring the customer always receives the best price. As much as I don’t want to see Wal-Mart grow anymore, I have preached on many occasions about the need for a central group or organization to make ethanol a viable product for the public. Wal-Mart seems like a great means of distribution. Already a monolithic corporation, would being called OPEC-esque seem out of place?
Government Subsidies for Ethanol Pump-Distribution
The US government has subsidized just about everyone in the biofuel supply chain except for the distributors. Overcoming the barriers to entry the petroleum industry has put in place requires deep pockets to create short-term loss-leaders. Most gasoline franchises in the US make it so difficult to sell ethanol in their stations that owners choose not to. The US has never been shy about being protective of its industries; they have just forgotten the last piece to make this ethanol fantasy a reality. Gas stations should be subsidized for the costs associated with setting up ethanol fueling facilities. I don’t see how this is different to subsidizing an ethanol plant.
Entrepreneurs Lead the Way…Again
The founder of the many Virgin brands, Sir Richard Branson, has a tendency for doing thing differently. His business concepts always seem strange at first, but quickly make sense when we all realize what a simple approach he takes to what we perceive to be complex ideas. Why not start Virgin Gas? The Virgin group is going to spend between $300 and $400 M over the next 2 years in their Virgin Fuels group. Their interest in developing ethanol and cellulosic ethanol plants makes them very similar to every other biofuel investor. We all know Sir Branson always does things differently…Could this be his next play?
The Virgin Group has the capital, creativity and enough committed investment in biofuels to make this worthwhile. Someone has to do it, and who better to do it than a company without any fuel station experience? Sir Branson’s interest in disruptive business ideas and strategies makes this a logical progression for Virgin Fuels.
Industry Organization is Crucial to Ethanol Survival
The Ethanol Industry needs to complete the chain to compete effectively against Big-Oil. No matter how much ethanol the US produces, without points of distribution, all I see is an inventory problem waiting to explode.
April 8, 2007 at 8:18 pm |
The WSJ has been carrying big oil’s water for years, but even they are starting to realize the fat lady’s sung. Oh sure, that was a cute little trick with the Underwriters Laboratory gambit, but it’s only good for a year’s delay then it’s on with the scalping.
Big Oil is done. Stick’em with a fork. They let the price get too high. For $60.00/barrel I can make energy out of your dirty undies.
The Republicans can’t keep the White House without Ohio, Indiana, and Missouri. The Dems have to have Iowa, Illinois, Michigan, Wisconsin, and Minnesota; and, the year divisible by four is coming up. See ya later, Exxon; tell Tinker-Belle we said, “Hi.”
January 30, 2008 at 2:16 pm |
I say that ethanol will not make much of a difference in the long run unless we can produce genetically modified organisms that will allow us to get more than twice the current amounts of fuel from the same crop yields. We could be looking at the next Intel or Microsoft if a bio-engineering company can produce an enzyme or bacteria or other organism that has incredible ethanol producing qualities. This could be the future. Bio-engineering could be a powerful force in the future. We could even make our own oil someday!
January 31, 2008 at 2:11 pm |
Cellulosic ethanol companies do rely on enzymes to convert cellulosic mass into ethanol. There is a big push in the enzyme/bacteria field to increase the efficiency. I can’t remember any companies off the top of my head but there are a couple startups that are well funded and working on bio-tech stuff for alt energy. Very exciting indeed.