The Ethanol Bubble: Is It Starting to Burst?

Judging by recent financial results, the big villains in the ethanol story—the American companies that are responding to government mandates by buying about 20% of the U.S. corn harvest and processing it into fuel—aren't exactly thriving. In fact, their bottom lines and stock prices are suffering pretty badly.

What gives? In theory, business should be gangbusters in the ethanol patch. Government policy has mandated consumption of the fuel, thus stimulating investment (and record high levels of production, see chart above).

But just because the government forces people to buy your product doesn't mean it's a surefire win. The combination of high oil prices, tariffs that protect domestically produced ethanol from imports, and tax credits for companies that blend ethanol into gasoline has stimulated something of an ethanol bubble. And as always happens during a bubble, excess capacity—and the vicious competition it creates—winds up eroding margins.

From Slate.com's Daniel Gross' article "Corn Dogs"