Unhappy New Year: Biofuels in the Tank—Financially

Unhappy New Year: Biofuels in the Tank—Financially

      Markets are often unkind to new ideas. Biofuels are a case in point. Several years ago, the price of oil per barrel shot upward, but the price of agricultural produce was still low. That offered possible profits for converting crops to synthetic fuels.

     Meanwhile, there were rising environmental concerns about the carbon footprint of burning fossil hydrocarbons for transportation. Plants pull their carbon in from the air as they grow, so burning plant-derived fuel is carbon neutral. (We won’t get into those spoiled sports who grumble about carbon emissions associated with fertilizer, herbicides, tractor fuel, processing heat, etc.)

     Finally, there has been a lingering hostility about large transfer payments to foreign oil-producing countries since the Oil Crises began in the 1970s. Thus, governments in Europe and the Americas subsidized production of synthetic fuel by as much as a dollar a gallon at the pump.

     It was a marriage made in political heaven. Market met politics, and a hundred economic flowers bloomed. The sizes ranged from the agro-industrial giants such as Archer-Daniel Midlands, down to initial public offerings (IPOs), down to individual entrepreneurs collecting “biodiesel” from restaurant grease traps. It didn’t matter that some of the start-ups were former pottery barns and wildcat oil drillers. The revolution was on.

     Then, things changed. Food production stumbled in some major producer areas; causing the prices of corn and soy feed stocks to rise. The economic meltdown hit in the 2008. Wellhead petroleum went from the range of a hundred-fifty dollars a barrel down to the thirties. Although it has ranged up to nearly the eighties, this is still a little more half the peak. Banks have also grown more cautious in lending, particularly to startups.

     Lastly, the perfect storm includes governments failing to renew subsidies. The United States (for big instance) has not yet managed to get the one dollar per gallon subsidy renewed for 2010.

     The result has been a dismal string of bankruptcies and retrenchments. Even if another wave of government support comes, such as from cap-and-trade, they cannot raise the dead. More importantly, they cannot erase business fears about erratic and undependable government policies. Most importantly, nothing erases fears of the market, which can also be erratic.

     This leads to a caveat about the proposed global cap and trade scheme. Such a regime will only add government eccentricities to those of the market. Cap-and-trade auctions will increase the variations in market swings. When problems are created, some favored industries will get government relief. Some industries and their governments may cheat. Some governments may abrogate the applicable treaty obligations.

     Getten’ to that new green age ain’t gonna be easy. Barring some cataclysm of Biblical proportions, a transferring from fossil fuels to alternatives will require decades … and some debacles such as the present one in the biofuels industry. That Exxon tiger will be pumping gas for a long time.


· Gardner, Timothy, “U.S. Biofuel Plants Go Bankrupt on Feedstock Costs, Reuters, June 27, 2008. Accessed at http://www.reuters.com/article/idUSN2437227120080627

· Korosec, Kirsten, “Pacific Ethanol's Troubles Signal More Bankruptcies to Come,” BNET, April 7, 2009. Accessed at http://industry.bnet.com/energy/10001023/pacific-ethanols-troubles-signal-more-bankruptcies-to-come/

· Murphy, Sean, “Bad Year for Biofuel Ends on a Dour Note,” Associated Press, Jan. 1, 2010. Accessed at http://news.yahoo.com/s/ap/20100101/ap_on_bi_ge/us_biodiesel_woes http://news.yahoo.com/s/ap/20091230/ap_on_bi_ge/us_ethanol_auction_nebraska

· Neb. Ethanol Plant Draws $30M at Bankruptcy Sale, Associated Press, Dec. 30, 2009. Accessed at http://news.yahoo.com/s/ap/20091230/ap_on_bi_ge/us_ethano


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