With renewables being so big these days, I rarely have time to concentrate on anything else. In fact, it's getting to the point where, even during my 'down-time,' I'm consumed by renewable energy.

Last night, after a long flight from Dallas, I threw back a couple of glasses of cabernet with dinner and hit the hay. Little did I know that well into REM sleep, my dreams would be overwhelmed by - you guessed it...renewables.

Fortunately, accompanying the ethanol production facilities dancing around my subconscious at 2:00 a.m. was the cute Asian stewardess from my flight that afternoon.

Now I'm not one to read into dreams. But interestingly enough, the first news story to cross my desk this morning came from the ethanol industry - in China!

Coincidence?

Most Likely.

But this observation certainly seemed like a moderately appropriate way to start out today's Energy and Capital.

The Chinese government just released some news regarding its expanding ethanol needs. Needs that could have an even more drastic impact on global production than expected.

You see, last year, ethanol blends accounted for 20 percent of all gasoline used in China. And to safeguard against rising oil prices, the government announced that it will now invest further to develop the biofuel.

China began experimenting with grain-based fuel in 2002, and is now third in ethanol production - behind only Brazil and the U.S.

But China is also running into the same problem the U.S. will encounter this year.

Demand is exceeding production capacities of existing and proposed ethanol plants in the country.

In the U.S., this is merely an issue of production facilities. Once the infrastructure is properly expanded (which is happening right now), domestic supplies should be able to meet the demand.

However, China's issue is not only about production facilities - it's about agriculture too.

The fact is, while the land resources in the U.S. are capable of producing a sustainable supply of 1.3 billion tons per year of biomass (One billion tons of biomass would be sufficient to displace 30% or more of the country's present petroleum consumption), China's land resources are struggling just to produce enough crops to feed its enormous population.

That leaves a real supply problem for the potential of domestic ethanol production.

You see, while China maintains the world's second-largest corn crop - in 2005, it was about 3 percent smaller...leaving less to feed citizens and less to turn into ethanol. As a result, some Chinese ethanol producers are now turning to alternative crops like cassava, which is used to make tapioca, and molasses.

In fact, China Resources Alcohol (Heilongjiang), one of China's largest grain-based ethanol makers was rumored to be discussing the construction of a 600 million yuan (U.S. $74 million) plant in Guangxi Province to turn cassava and molasses into fuel.

And as it turns out, according to Li Shizhong, a professor at the center for Biomass Engineering at the China Agricultural University - using cassava and molasses could actually not only pick up the slack from struggling corn crops, but actually help cut the overall cost as well.

The raw material expense of making one ton of ethanol from cassava may be 2,100 yuan, compared with 3,300 yuan for ethanol made from corn.

Nonetheless, between China's aggressive renewable energy policies and the United States' strong ethanol agenda (growing dramatically due to national security concerns and high oil prices), the biofuels industry as a whole is going to be working overtime well into the next decade to keep up with global demand.

So much so, that once domestic production in the U.S. is able to meet domestic demand - don't be surprised to see U.S. ethanol exports kick it up a notch.

Yes, it's definitely a good time to grab a piece of this market while it's still within reach!

Stay tuned to Energy and Capital for more.

You can also access a number of archived stories on the ethanol industry at www.greenchipstocks.com.


- Jeff Siegel