Ethanol: Report on Current Issues

Ethanol Capital Management LLC

August 19, 2008

This report presents urgent and critically important facts and information
that make it clear how increased use of ethanol can reduce the potentially
catastrophic effects of U.S. dependence on foreign oil, significantly enhance
U.S. economic growth, reduce global warming and strengthen U.S. security
interests world wide.

Vitally important topics are presented under the topic headings below:

1. Production and Use of Ethanol Results in Major Financial Gains

to U.S. Consumers and the Economy.

2. Ethanol Use Protects U.S. Strategic Interests Worldwide.

3. The Use of Ethanol Results in a Significantly Cleaner

Environment and Reduces Global Warming.

4. Media Myths Debunked by Understanding Powerful Positive

Facts about Ethanol.

5. Exciting New Developments in Ethanol Production and Use.

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1. PRODUCTION AND USE OF ETHANOL RESULTS IN MAJOR
FINANCIAL GAINS TO U.S. CONSUMERS AND THE ECONOMY.

Financial Gains from the use of Ethanol

The United States, Japan, and much of Europe are on the verge of recession.
A primary reason is the current price of oil and gasoline.

To return to vigorous economic growth, the U.S. must lower the cost of
gasoline. One way this can be done is for the U.S. to produce and use much
more ethanol.

According to research by Merrill Lynch’ s Commodity Strategist Francisco

Blanch, the current production and use of ethanol in the U.S. has lowered the
cost of gasoline by 15%. 1 Increasing ethanol use will make the cost of
gasoline even lower.

Increasing the use of ethanol will result in the reduction of payments to

import oil from foreign countries.

Currently, the U.S. consumes 20 million barrels of oil per day.2 The U.S.
imports approximately 66%3 of this amount or 13 million barrels of oil per
day. At $120 per barrel, the U.S. would transfer $1.6 billion per day to
foreign countries. Since 1970, the U.S. has sent $3.8 trillion to foreign
countries to buy oil.4

In 2007, the U.S. ethanol industry produced 6.5 billion gallons of ethanol
which displaced an estimated $16.5 billion5 worth of oil.

At the consumer level, the average family of four has a net economic benefit
of about $16006 per year because ethanol blended with gasoline reduces a
family’s expenditure on fuel, and thus provides the family with the
opportunity to purchase other goods and services or increase savings and
investments.

This $1600 of net economic benefit per family is approximately equivalent

to the recent economic stimulus package from the federal government.
Doubling the current production and use of ethanol would be similar to a

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government stimulus payment of approximately $3200 per year to every
family in America.

LECG, an independent global research firm which provides industry

research and analysis to Fortune 500 companies and government agencies all
over the world, performed a study on the economic impact of the U.S.
ethanol industry to the U.S. economy in 2007. They study found that, in
2007 alone, ethanol production and use resulted in $12.3 billion of additional
income for American consumers, added over 238,000 new jobs across
multiple sectors and generated an estimated $4.6 billion in federal tax
revenue. 7

Comparing government support for the oil and gasoline industry to the
rural-based ethanol industry

The U.S. government has subsidized the oil industry since the early 1900s
and continues to do so. Now, however, despite the record profits of oil
companies and the crucial need to develop alternative forms of energy, the
U.S. continues to provide significant government subsidies to the oil
industry. A major research study indicates that the real price of gasoline
would be $4.00 to $14.008 per gallon higher if government subsidies and
programs as well as environmental, health and social costs were taken into
account.

Many other nations, including India and China, which have historically
subsidized oil and gasoline, are reducing those subsidies and increasing the
subsidies to their ethanol industries because the use of ethanol benefits their
own economies and reduces the need to import oil.

Summary

From these facts it is evident that to facilitate economic growth, benefit

U.S. consumers, and achieve greater energy independence, government
policy should be changed to consider reducing subsidies to the oil and
gasoline industries. Instead, the government should encourage the
widespread use of ethanol including the manufacturing of more flexible
fuel vehicles, which are built to run on a mixture of 85% ethanol and
15% gasoline (E85).

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2. ETHANOL USE PROTECTS U.S. STRATEGIC INTERESTS
WORLDWIDE.

The U.S. cannot afford to be dependent on foreign oil, which seriously

compromises U.S. strategic interests. Unless this drain ($3.8 trillion paid for
foreign oil since 1970) on U.S. resources is stopped, the position of the U.S.
in the world will be substantially weakened.

One of the ways to stop the bleeding of U.S. money to foreign oil producers
is to increase the amount of ethanol produced and used in the U.S.

The U.S. Energy Information Administration estimates that 70% of world oil
reserves are located in OPEC nations. 9 Many OPEC nations have agendas
at odds with U.S. interests abroad. These foreign oil powers have been
brazen in attempting to influence U.S. foreign policy and will likely continue
to do so by holding the U.S. hostage to increasing oil prices.

These foreign oil powers have sought to direct American policy in the past
and will continue to do so in the future. As an example, during the 1970’ s
conflict in the middle-east between Israel and Arab countries, OPEC enacted
an oil embargo after the U.S. sided with Israel during the conflict. This
raised oil prices to historically high levels. In the November 2007 meeting
of OPEC ministers, Hugo Chavez of Venezuela threatened to raise the price
of oil to “hundreds of dollars”per barrel if the U.S. were to come in conflict
with Venezuela or Iran. 10

Summary

Continuing high payments by the U.S. for oil imports will weaken the
U.S. strategic position worldwide. Foreign oil powers will also continue
to use oil as a tool to attempt to manipulate the U.S. politically and
economically. The only immediate solution to these problems is to
domestically produce and use more ethanol.

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3. THE USE OF ETHANOL RESULTS IN A SIGNIFICANTLY
CLEANER ENVIRONMENT AND REDUCES GLOBAL WARMING.11

In response to the Clean Air Act and other environmental legislation, ethanol
is being used nationwide to meet requirements for cleaner exhaust from cars
and trucks. Ethanol continues to be a major factor in reducing greenhouse
gas emissions.

Pure ethanol contains 35% oxygen and burns cleaner than gasoline. Ethanol
is known as an “ oxygenate”when added to fuel. Oxygenates are added to
motor vehicle fuels to make them burn more cleanly, thereby reducing toxic
tailpipe pollution, particularly carbon monoxide. Oxygenates also extend the
fuel supply.

MTBE (methyl tertiary-butyl ether), an oxygenate that is made from natural

gas, has been classified as a possible carcinogen by the EPA. It has been
eliminated from the U.S. fuel supply. In its place, ethanol has been used to
meet air quality requirements.

Ethanol is biodegradable and does not pollute groundwater. If ethanol is

spilled, it simply evaporates leaving no residue. Conversely, gasoline is a
significant pollutant if spilled.

In 1988, Denver, Colo., was the first city in the U.S. to begin using ethanol
in its fuel supply solely to meet EPA clean air standards. All states where
the EPA indicates that pollution is above EPA standards use ethanol to
reduce pollution and meet the standards.

In 2006, ethanol use in the U.S. reduced greenhouse gas emissions by

approximately 7.8 million tons, equal to removing the annual emissions of
more than 1.18 million cars from the road. The U.S. Department of Energy
estimates that 13 million tons of greenhouse gas emissions in the U.S. were
avoided in 2007 due to biofuels production and use.12 This is like removing
2 million cars from the road.

Ethanol enriched fuel reduces harmful tailpipe emissions by as much as

30%. The American Lung Association credits ethanol-enriched fuel with
reducing smog-forming emissions in Chicago by 25% since 1990. It reduces
tailpipe fine particulate matter (PM) emissions by 50 percent. These

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emissions pose the greatest health threat to children, senior citizens and
those with respiratory ailments, such as asthma.

Ethanol is also a renewable resource produced from American-grown crops.

Conversely, gasoline is a nonrenewable resource refined from crude oil, a
fossil fuel that many experts predict may be totally exhausted by the year
2050.

Summary

The use of ethanol should be increased to further reduce greenhouse

gases and enable the U.S. to exceed E.P.A. clean air standards.

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4. MEDIA MYTHS DEBUNKED BY UNDERSTANDING POWERFUL
POSITIVE FACTS ABOUT ETHANOL.

The media perpetuates the myths that ethanol is bad for U.S. consumers, our
economy and the world. Below, we present the most egregious myths and
then the facts debunking the myth.

Myths about the Ethanol Industry

Myth: Increasing the Amount of Corn Consumed Would Improve the

Diet of U.S. Consumers
Fact: Of total corn production in the U.S., 9% is used for food domestically.
About half of this (5-7% of total production) is used to produce corn syrup
and sugars for soft drinks and other processed foods. Soft drinks and other
food products made from corn sugars are a leading cause of obesity and
diabetes particularly in young adults. The Department of Health and Human
Services estimates that 57 million Americans have prediabetic symptoms
and are at risk of developing diabetes.13

Approximately 51% of corn is used for animal feed domestically while most
of the 19% exported is also used as animal feed (see chart below for
additional corn allocation details). Corn is used to fatten the animals,
increasing flavor by increasing the saturated fat content. This can lead to
heart disease and other health problems. Heart disease is the number one
killer in America. 14 The amount of corn grown for direct consumption or
use in cereals is only 1-2%.

% Allocation of U.S. Corn Production

2006 2007
Billions of bushels % %
Animal feed 50% 51%
Fuel alcohol 19% 21%
High-fructose corn syrup 5% 3%
Glucose and dextrose 2% 2%
Starch 2% 2%
Beverage alcohol 1% 1%
Cereals and other products 2% 1%
Total food use 12% 9%
Exports 19% 19%
Source: USDA, Economic Research Service

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Myth: Using Corn to Produce Ethanol Increases the Cost of Food
Fact: Ethanol from corn has had minimal impact on food prices in the U.S.
According to a study by Professor Richard K. Perrin of the University of
Nebraska, U.S. food prices increased approximately 1% over the last two
years due to corn-based ethanol production. 15 The Council of Economic
Advisers estimates that the total global increase in corn-based ethanol
production accounts for only 3% of the global increase in food prices.16

The significant increase in the price of oil and gasoline has had the greatest
impact on the cost of food.

Purdue University published a study of the primary reasons for rising corn
prices. The study found that $3 of the $4 increase in the cost of a bushel of
corn between 2004 and 2008 was attributable to higher oil prices, and in
turn, increased the cost of food.17

The price of energy has continued to be the driving force for inflation of all
products. According to a presentation given by the USDA, from April 2007
to April 2008, the International Monetary Fund reported that the price of all
commodities and the price of food commodities alone increased by
approximately the same percentage (47% and 46%, respectively). During
this same period, however, the IMF reported an increase in global oil prices
of 68%.18

A study by the Center for Agricultural and Rural Development at Iowa State
University indentified a close correlation between energy prices and retail
food prices. According to the report, it is estimated that a 10 percent
increase in energy prices can contribute about 5 percent to an increase in
retail food prices.19

Corn and other food crop production can and will increase, driving down
corn price, even without using additional acreage. Modern technology and
advanced farming techniques will be applied to agriculture in the U.S. and in
less developed countries to increase production. Further, advances in the
areas of genetics will also increase yields per acre. Monsanto predicts that
by 2030 corn yields will reach 300 bushels per acre, double current levels of
150 bushels per acre. This means that in the U.S. production would grow
from about 13 billion bushels to 26 billion bushels, providing both food and
fuel to a growing global economy without any additional land brought into
production.20

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Additional facts on the U.S ethanol industry: 21

 Flex-fuel vehicles are designed to run on E85 (85% ethanol and 15%
gasoline) — the cleanest-burning, renewable fuel available today.
 Fuel enriched with 10% ethanol burns cleaner, helping to remove
gummy deposits in the fuel system so engines can run with optimal
performance. That is one of the reasons why in 2007 race cars in the
Indy 500 started using 100% ethanol.22
 Blending gasoline with 10% ethanol helps the engine run at cooler
temperatures, which can add to engine longevity.
 Ethanol is blended into more than 50% of the U.S. fuel supply, mostly
as E10 and E85.
 Ethanol is made from crops grown in America, primarily corn.

Myths about Ethanol’

s Impact on the Environment

Myth: It takes excessive amounts of water to produce ethanol.

Fact: A typical ethanol biorefinery uses approximately three gallons of
water for every gallon of ethanol produced23 or about the same amount of
water used by three golf courses.24 All 130 ethanol plants in the U.S. use the
same amount of water in total as 390 golf courses. There are approximately
17,000 golf courses in the U.S., which means ethanol plants in total use less
than 3 percent of the amount of water used by all golf courses in the U.S.25

Myth: Ethanol does not reduce air pollution.

Fact: Because ethanol is inherently cleaner than gasoline, it emits less
hydrocarbons, nitrogen oxides, carbon monoxide and hydrogen. Ethanol
reduces carbon monoxide emissions by as much as 25 percent—and less
carbon monoxide helps reduce ozone formation and helps reduce levels of
greenhouse gases. According to the EPA, gasoline is the largest source of
manmade carcinogens. Ethanol reduces overall toxic pollution by diluting
harmful compounds found in gasoline such as benzene.26

Additional facts on ethanol and the environment:

 Ethanol is a clean-burning, renewable fuel with E85 being the cleanest

burning fuel available on the market today.

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  The use of 10% ethanol-enriched fuel reduces greenhouse gas
emissions by 12 –19% compared with conventional gasoline,
according to Argonne National Laboratory.
 Ethanol reduces tailpipe fine particulate matter emissions by 50%.
 Ethanol is biodegradable, meaning it won't harm groundwater in the
event of a spill.

Myths about the Economic Impact of Ethanol

Myth: Ethanol has minimal impact on gasoline prices.

Fact: Ethanol adds to the overall supply of motor fuel in the U.S. and helps
keep pump prices competitive and affordable. 27

Myth: Switching  to ethanol is 

expensive.
Fact: All major auto manufacturers approve the use of up to 10% volume of
ethanol in gasoline. Over 191 different makes and models of flex-fuel
vehicles (vehicles that run on higher blends of ethanol such as 85% ethanol
or E85) have been produced for U.S. consumers since 1995. A new car can
be made flex-fuel-capable for about $35. And the cost to adapt a retail gas
pump for E85 is a bargain –as little as $10,000. 28

Myth: Ethanol raises the cost of gasoline.

Fact: While many predicted that the switch from MTBE to ethanol would
increase the price at the pump, the fact is that there has been no negative
impact on gasoline supplies or the cost per gallon of gasoline. Ethanol is less
expensive than other oxygenates and octane enhancers. In fact, ethanol is
also less expensive than ordinary gasoline.29

Myth: Ethanol takes more energy to produce than it contributes.

Fact: In June 2004, the U.S. Department of Agriculture updated its 2002
analysis of the issue and determined that the net energy balance of ethanol
production is 1.67 to 1. For every 100 BTUs of energy used to make ethanol,
167 BTUs of ethanol is produced. These figures take into account the energy
required to plant, grow and harvest the corn—as well as the energy required
to manufacture and distribute the ethanol. The net energy balance of ethanol
production continues to improve because ethanol production is becoming
more efficient. For example, one bushel of corn now yields 2.8 gallons of
ethanol—up from 2.5 gallons just a few years ago.30 Recent, technological

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advancements in ethanol production will likely yield 3 gallons or more per
bushel.

Myth: Americans blame the production and use of ethanol for rising
food prices.
Fact: America has continued to show its support for ethanol. A recent
national survey commissioned by both the Republican and Democrat parties
has shown that 49% of Americans blame high food prices on the rising price
of oil while only 8% indicated ethanol was the cause. The study also shows
that the majority of Americans (59%) favor increasing the use of ethanol.31

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5. EXCITING NEW DEVELOPMENTS IN ETHANOL PRODUCTION
AND USE.

 ICM, Inc. and other leading firms in design and construction of state-of-
the-art biorefineries are developing technology to make ethanol
production more efficient, cleaner and cost-effective. On June 16, ICM,
announced its “ ethanol biorefinery of the future,”a six-part technology
package that includes the following advantages: increased yields of both
food and fuel, reduced natural gas consumption, a platform for emerging
technologies and a bridge to cellulosic ethanol.32 Other engineering firms
are conducting research on alternative and more cost-effective fuel
sources, such as using biomass that would otherwise be considered waste.

 Monsanto is conducting research on how to increase the ethanol yield per

bushel of corn and the yield of corn per acre of land. Monsanto predicts
that corn yield will double from 150 bushels per acre to 300 bushels per
acre by 2030. This would increase the corn crop from approximately 13
billion bushels33 to 26 billion bushels without using any additional land.
These and other technological advancements will ensure that ethanol
production remains environment-friendly, and continues to help meet
demands for both food and fuel.

 Besides advances in technology, ethanol will be distributed more

effectively to reduce costs for consumers. Ethanol is now being shipped
directly to gas stations from ethanol biorefineries. Instead of shipping
ethanol long distances to blending facilities then back to the consumers,
the ethanol producers, gas retailers, and consumers benefit from
“ blending at the pump,”a more cost effective way of getting the product
to market. This provides consumers reduced fuel costs at the pump as
ethanol producers bypass oil companies and sell directly to retailers (only
2% of gas stations are owned by oil companies34). Blending at the pump
is already being used in the Midwest and is spreading rapidly to many
other states.

 Various projects are currently underway to ship ethanol and ethanol

blends via pipelines allowing for more cost effective ways of distribution.
Magellan Midstream Partners is considering a $3 billion ethanol pipeline
from the concentration of ethanol plants in the Midwest to end users and
distribution centers on the east coast.35 Kinder Morgan’ s Central Florida

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Pipeline Co. plans to begin shipping ethanol through its 104 mile pipeline
by the end of 2008.36

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 Disclaimer
This document and any attachments are for communication purposes only and are not intended to be a
balanced view of investing in ethanol biorefineries. This information and any attachments neither
constitute an offer to sell nor a solicitation of an offer to buy any security or other financial instrument
including any limited partnership or LLC interest. The information may be inadvertently incorrect and
is subject to change without notice. Care was taken in the production of this document and any
attachments to obtain accurate information from reliable sources. However, Ethanol Capital
Management LLC does not attest to the accuracy of any piece of information contained in this
document or any attachments. In addition, some of the material in this document or in the attachments
may contain opinions of the writer or of Ethanol Capital Management LLC and projections of future
events made by the writer or by Ethanol Capital Management LLC. The opinions, projections and
conclusions of the writer or of Ethanol Capital Management LLC may not be accurate.

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1
Barta, Patrick. “ As Biofuels Catch On, Next Task Is to Deal With Environmental, Economic Impact.”
Wall Street Journal, March 24, 2008.
2
http://www.eia.doe.gov/basics/quickoil.html (Department of Energy, Energy Information
Administrations, Petroleum Basic Statistics)
3
U.S. Crude Oil Supply & Disposition, Energy Information Administration, 2008.
4
http://zfacts.com/p/721.html (The Cost of Fossil Fuel Imports, Data Compiled from the Department of
Energy)
5
John M. Urbanchuk, “ Contribution of the Ethanol Industry to the Economy of the United States” , LECG
LLC, February 20, 2008.
6
Iowa Renewable Fuels Association, “ Fueling the Truth” , May 9, 2008
7
John M. Urbanchuk, “ Contribution of the Ethanol Industry to the Economy of the United States” , LECG
LLC, February 20, 2008.
8
International Center for Technology Assessment, “ The Real Price of Gasoline –An Analysis of the
Hidden External Costs Consumers Pay to Fuel Their Automobiles” , Washington, D.C., November 1998.
9
http://www.eia.doe.gov/emeu/international/oilreserves.html (Department of Energy, Energy Information
Administrations, Oil Reserves)
10
http://www.memri.org/bin/articles.cgi?Page=archives&Area=ia&ID=IA40507 (Middle East Media
Research Institute)
11
Unless otherwise noted, information in this section was obtained from the Ethanol Promotion and
Information Council’ s 2008 publication “ Environmental Benefits of Using Ethanol” .
12
United Stated Department of Agriculture, “ Fact Sheet: Gas Prices and Oil Consumption Would Increase
Without Biofuels” , June 11, 2008.
13
http://www.cdc.gov/diabetes/pubs/pdf/ndfs_2007.pdf (Center for Disease Control and Prevention)
14
http://www.cdc.gov/DHDSP/announcements/american_heart_month.htm (Center for Disease Control
and Prevention)
15
Richard K. Perrin, “ Ethanol and Food Prices –Preliminary Assessment” , University of Nebraska, 2008.
16
http://www.whitehouse.gov/cea/lazear20080514.html (The White House Council of Economic Advisors)
17
http://domesticfuel.com/2008/07/26/study-credits-ethanol-policy-with-25-percent-of-corn-price-hike/
(Domestic Fuel –Alternative Fuel News)
18
United States Department of Agriculture presentation on “ Food & Fuel”quoting statistics from the
International Monetary fund
19
Todd Neeley, “ Experts Differ on Food Inflation” , DTN Ethanol Newsletter, April 11, 2008.
20
“300-Bushel Corn is Coming” , Ethanol Producer Magazine, October 2007
21
http://www.drivingethanol.org (Ethanol Promotion and Information Council)
22
http://www.washingtontimes.com/news/2007/may/24/20070524-122339-5892r/
23
“Ethanol and Water Use Fact Sheet” , Ethanol Promotion and Information Council, Inc
24
Gil Laundry and Clint Waltz , “ Golf Course Water Use Survey” , The University of Georgia, 2002.
25
Calculation: 6.5 billion gallons of ethanol x 3 gallons of water = 19.5 billion gallons of water; 17,000
golf courses x 50 million gallons per course = 850 billion gallons; 19.5/850 = 2.3%
26
http://www.ncga.com/Ethanol/main/killing_myths.htm
27
http://www.drivingethanol.org (Ethanol Promotion and Information Council)
28
http://www.wired.com/wired/archive/14.10/myths.html
29
http://www.ncga.com/Ethanol/main/killing_myths.htm (National Corn Growers Administration)
30
Ibid.(NCGA)
31
Greenberg Quinlan Rosner Research Public Opinion Strategies, “ Public Support for Ethanol National
Survey Results” , July 10, 2008.
32
Redorbit.com, “ ICM, Inc. Guarantees Food AND Fuel Production in 2010” , June 16, 2008.
33
United States Department of Agriculture, “ World Agricultural Supply and Demand Estimates” , July 11,
2008.
34
“News, Analysis & Informed Opinion” , Fortune, June 9, 2008.
35
Jason Womack, “ Magellan, partner considers ethanol pipeline” , Tulsa World, February, 20 2008.
36
Asjylyn Loder, “ Central Florida Pipeline to carry first ethanol flow” , Tampabay.com, April 15, 2008.

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