Biofuels and Big Oil Both Hope for Higher Crude Prices

By Matt Carr, Executive Director, Algae Biomass Organization

They say that politics makes for strange bedfellows, but what about global petro-economics?

As the global price for a barrel of oil creeps lower and lower, the US algae industry ironically finds itself in the same position as Big Oil: We’d both prefer crude oil prices to rise.  At $45 per barrel, it’s too costly for oil companies to frack, and most algae-fuel techno-economics haven’t matured to the point where companies can produce at that rate.  Both industries are watching OPEC’s moves.

The rock bottom crude prices are a kick to the gut of the biofuels industry, coming at a time of great progress, especially in the advanced biofuels space. In October, Abengoa Bioenergy officially opened its cellulosic biorefinery in Kansas. Poet DSM and DuPont facilities in Iowa and a few others rounded out the news of construction or operations that are bringing these fuels to market.

And last month Algenol Biofuels announced their algae-derived fuels have been certified by the EPA to meet the requirements of the Renewable Fuel Standard, making the company eligible for the Renewable Identification Numbers (RIN) needed to begin commercial sales.

In an industry where it has been said that “everyone wants to be first to be second,” the opportunity to be fourth, fifth and sixth is now upon us, and should accelerate further developments and commercial plants coming on line.

Not surprisingly, biofuels opponents have seized on falling oil prices and increasing domestic oil production to call for an end to the Renewable Fuel Standard and other biofuel programs.

Knee-jerk reactions to temporary market trends are no way to build an economy.  Smart money is looking beyond what most people expect to be a short-lived scenario.  Political instability concerns in numerous nations will ultimately trump short-term price fixing as the global thirst for liquid transportation fuels continues to increase.

It’s not a question of if, but rather when, we will see prices rise again. Indeed, investment in research, development and demonstration makes the most sense in times of plenty.  We know the future holds higher prices – developing low-cost, sustainable solutions now is the best way to hedge.

Let’s keep in mind that while fracking opened up wide swaths of new, domestic fossil fuels, it didn’t make discovering it and drilling for it any cheaper. The fact is that the cost to unlock new sources of crude oil remains relatively high because the easy fossil fuels have been discovered and drilled, for the most part.

It’s why companies are turning to riskier and more costly options like deep water drilling and fracking. That, combined with the finite supply and an inevitable expanding demand for liquid transportation fuels, means the destiny is higher prices. It’s the law of supply and demand. The Digest recently reported that the “sweet spot” for crude is around $95 per barrel or higher.

Conversely, the sweet spot for biofuels seems to be in the $60-80 per barrel range.

The biofuels industry continues to drive down the cost curve for producing domestic, low-carbon fuels.  Efforts by the National Alliance for Advanced Biofuels and Bioproducts (NAABB) resulted, as the Digest reported earlier this fall, in a reduction in the cost of producing a gallon of algae fuel from a baseline $240 a gallon to $7.50/gallon in just three years. Algenol Biofuels reports it can produce algae based ethanol for as low as $1.27 per gallon.

So the question becomes: is the biofuels industry better equipped to withstand the likely market fluctuations in years to come because it can produce fuels within a range of crude oil market prices? Or is it the oil industry, which needs a sustained high cost of fuel to financially justify and withstand the increasing costs of exploration and discovery?

The question for many biofuels companies, especially in the algae space, may be moot. Indeed, policy paralysis in the United States is a bigger threat to biofuels than low prices.

Yet today we are reaping advantages in renewable and fossil energy production largely due to technologies and incentives laid down years ago. Doing so again is not only good for the companies developing the technologies, but also the oil companies who will have more options to meet global supply and drive shareholder value, and consumers and citizens who benefit from low-carbon fuels produced here in the United States.

So – as consumers, let’s enjoy the respite from $4.00 a gallon gas. But as a nation, let’s invest now in advanced biofuels – our best shot at moderating fuel prices for years to come.