by Jim Lane (Biofuels Digest) 4 weeks past the helter-skelter Oil Crash, as prices plateau for now (and maybe for the long term) — what have we learned about energy markets in the Age of Alternatives?
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When prices respond vigorously to very small changes in supply or demand, they are said to be elastic. And rubber should be so elastic.
As we reported in the Digest last month, it came down to about 4 million barrels per day of new capacity, mostly from North America, mostly unconventional oils. That was the supply overhang that OPEC refused to correct for, by reducing its own production, in order to preserve high oil prices. Instead, Kuwait and Saudi Arabia, looking at marginal production costs as low as $2 a barrel, concluded that they would win a price war handily over unconventional shale oils — and undertook the longer-term strategy of forcing unconventional production out of the market rather than protecting prices by allowing their own market share to erode.
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You can thank shale oil for prices at the pump that remind you of the 1990s. But you can also thank biofuels — for, without that additional 2 million + barrels coming from this additional supply source, we wouldn’t be seeing a price war between shale oil producers and OPEC. That demand would have simply been absorbed into the pool. You can also thank increased engine efficiency — and down the line, we might find ourselves thanking electrification of the fleet.
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Policymakers — well, they want prosperity — which comes not from the zero-sum game of high producer prices or low consumer prices, but from productivity gains inspired by industrial or farm intensification. So they tend to like rising demand combined with waves of innovation. And they dislike innovations that cost more — no matter how “nice” the externalized outcomes might be — because they make consumers grumpy.
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And the Renewable Fuel Standard is best understood as a guarantee of an available market for affordable alternatives — not as a guarantee for $6 fuels and in spite of any pain at the pump.
Yes, there’s carbon, there’s energy security and rural development. But, where are the armies marching demanding biofuels for those reasons? Famers barricade highways only during times of low commodity prices — and no other. And energy security hawks generally march in military parades and generally avoid the limelight of politics. Carbon advocates are generally so minimally conversant in farming practices that they are apt to believe that eliminating biofuels will flood markets with cheap grain and drive down food prices around the world — rather than the actual impact, which would be to flood the world with low productivity and drive farmers out of the supply chain and into the cities and welfare rolls.
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One of the solutions is to aggregate the feedstock demand and disaggregate the supply — so that giant buyers have more economic power than tiny sellers. That’s the OPEC route, and for sure demand in the biodiesel/grease market is being aggregated, but more is likely needed.
Aggregation costs will need to come down as well — if agricultural residues are going to be viable sources of feedstock. $100 per ton cellulosic feedstocks are great pathways to $4 fuels, maybe even $3 fuels — but not a path to $2.00 fuels.
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A producer that has an integrated biorefinery and produces chemicals as a high-value portion of “the barrel” — with fuels to provide volume needed for large scale? That sounds like a more robust strategy than building 10 million pound chemical plants based on a great chemicals-focused fermentation technology.
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We rather like the idea of building out a suit of bolt-on technologies at one site — multiple fermenters, multiple drop-in products (where a fermentation technology is used), each contributing towards aggregate demand and thereby driving up the productivity. At the same time, higher-value chemicals contribute margin which overcomes the increased marginal cost of transporting biomass or sugars over larger distances.
In turn, what can be done with multiple fermenters, might also be done with fractionation, in the case of thermochemical technologies.
The key — drive up the capacity. Bigger, but more diversified.
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M&A activity might be just what the doctor ordered to increase the economic power of producers and bring down feedstock costs so that they are competitive in the long term within the rollercoaster of commodity fuel prices. READ MORE