BULLS & BEARS: Indiana’s in biofuel game; now it should strive to win

Over the past few months, Indiana Sen. Richard Lugar has been vocal in touting the benefits of renewable fuels such as ethanol and biodiesel. It would be wise for the state’s government and business leaders to heed his message.

The renewable fuel industry is gathering momentum and has a high probability of growing into a substantial industry. The energy bill President Bush signed into law last summer mandates the use of 7.5 billion gallons of ethanol each year by 2012, nearly double current U.S. production. And the administration set a long-term national goal of replacing 75 percent of Mideast imported oil with renewable fuels by 2025.

Big-moneyed entrepreneurs already have gotten the message. One of Silicon Valley’s most revered venture capitalists, Vinod Khosla, has formed a venture fund to invest in biofuels. Visionary billionaires such as Richard Branson, Ted Turner and Bill Gates all recently have earmarked significant investments in ethanol and renewable energy.

Indiana has the assets that would be necessary to become a big participant in this developing industry. In the United States, most of our ethanol is derived from corn, where Indiana ranks fifth in the nation in production.

In addition, researchers are working on cellulosic ethanol made from cornstalks, grasses and tree bark, or non-edible biomass that wouldn’t divert from the country’s food supply. Developments in biopharma will be needed to convert cellulose into simpler sugars that can be used to make ethanol. Here again, Indiana is home to biopharma and agribusiness assets that could help develop the new technologies to make this process economically viable.

To be sure, Indiana is already in the game. While only one ethanol plant is in operation in Indiana, about 20 new facilities are at various states of development, including a few biodiesel plants that produce fuel from soybeans.

But our neighbors are not standing still. Illinois is home to agribusiness giant Archers Daniels Midland, and Iowa, Minnesota and Nebraska have facilities already producing ethanol. As with any industrial wave, the benefits ripple through a state’s economy. Metal fabricators in the state of Wisconsin are overwhelmed with orders to make equipment for ethanol refineries, and are adding employees and expanding plants to meet demand.

Granted, the economics of ethanol are not flawless, relying on government subsidies, and the cost of producing cellulose ethanol has not yet been proven to be efficient. But most venture businesses encounter hurdles they must solve.

One only has to look at Brazil for the ancillary benefits ethanol provides. Brazil makes ethanol from the vast supply of sugar cane that grows readily in that country. Brazil has not only weaned itself of imported oil, but an estimated $69 billion that would have gone to the Middle East has stayed in the country. And besides the monetary and political benefits, ethanol has environmental advantages over fossil fuels.

Indiana’s assets are suited to the growing ethanol industry. The strength of our transportation and distribution systems add leverage to those assets. Why shouldn’t our state and its venture funds respond like the poker player who has two aces in the hole, and push our chips “all in”? The arrival of the Silicon Silos across the Indiana plains would boost our state’s economic growth.

Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.

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