Oil price fall adds to biofuel’s woes

Source: By Jonathan Kingsman, Financial Times • Posted: Friday, January 9, 2015

Workers inspect the quality of harvested oil palm fruit outside the processing mill at the Bell Eco Power Sdn. palm oil operations in Batu Pahat, Johor, Malaysia, on Monday, March 3, 2014. Palm oil gained for a third day to trade near the highest level in 17 months on concern that dry weather may curb output in Malaysia and Indonesia, the world's biggest producers of the oil used in food and fuel. Photographer: Goh Seng Chong/Bloomberg

Low oil prices may be good news for the world’s oil consumers but they are bad news for the world’s biofuel producers.

It was never intended to be this way. Back when governments first mandated legal minimums for biofuel content in transport fuels, “peak oil” was on everyone’s lips and there was a general fear that oil prices could head towards $200 per barrel. Now that oil prices are closer to $50 those mandates are tougher to justify economically.

 This year’s bumper corn crop in the US has helped those economics but corn prices have been drifting higher since October; margins for most US ethanol plants are now wafer-thin, if not negative.

As for biodiesel, the closely watched benchmark for biodiesel profitability — POGO, the spread between palm oil versus gas oil, or diesel — has inverted.

In September last year palm oil, the widest distributed vegetable oil and a source of biofuels, was $252 per tonne cheaper than gas oil. It is now $121 a tonne more expensive than gas oil, making it unprofitable to produce biofuels from the vegetable oil.

The biofuel industry initially grew with the political support from three constituencies: environmentalists, farmers and, in the US at least, the “energy security” lobby. Over the past few years, environmentalists have largely withdrawn their support for biofuels while shale oil has given the US their energy security without the need for biofuels.

Farmers in the US are still powerful supporters of the sector, keen on the extra demand that biofuels give them for their crops. EU farmers, however, have at least partially withdrawn their support: they like to be seen as custodians of the countryside and prefer to be part of the solution, rather than part of the problem, of global hunger.

The fall in the oil price comes at a time when governments generally are questioning their support for biofuels.

In the US, producers have already been hit by the deferred decision to renew the $1 per gallon blender credit.

In Brazil, as part of an anti-inflationary strategy, the government has for the past few years been holding the domestic gasoline price below the world price; this was already making it difficult for domestic ethanol producers to compete. Domestic gasoline prices are now higher than world market equivalent, and the government is under pressure to lower domestic prices. If they do so it will be even harder for the domestic ethanol industry.

China imported an estimated 875,000 tonnes of biodiesel last year, mainly from Indonesia, to supplement oil supplies. With the fall in crude oil prices this demand will probably disappear. Last year Argentina was a major biodiesel exporter, their soyabean based product being blended in Europe and then shipped largely to west Africa. That flow is also likely to cease.

Despite good crops, it is difficult to make the economics of biofuels work in a low oil price environment. For its survival the sector will have to depend on political support through legally mandated demand. The challenge for the sector will be to maintain that support.