U.S. Biofuel Boom Running on Empty


As nations around the world begin to plan for Copenhagen to discuss the next generation Kyoto treaty, it is increasingly obvious that they will be ineffective.

Chief among the reasons for this ineffectiveness is that with the price of oil at its current state, it is simply not cost effective to use alternative fuels that will dump less CO2 into the atmosphere. The oil producing nations are probably not maintaining crude at this level to doom the planet to disaster, they are simply smart business people that are providing their “drugs” to the “addicts” at a price and in a way that will insure that no one can ever move off.

This is the basic problem with crude oil as an energy source. No matter how cheaply new liquid fuels can be developed, it is almost assured that oil can be dropped in price to match the new economic competitor such that oil will be cheaper.

Below are selected clips from the Wall Street Journal regarding the failing of companies that were trying to compete with liquid gold from the ground.

Two-thirds of U.S. biodiesel production capacity now sits unused, reports the National Biodiesel Board. Biodiesel, a crucial part of government efforts to develop alternative fuels for trucks and factories, has been hit hard by the recession and falling oil prices.

The global credit crisis, a glut of capacity, lower oil prices and delayed government rules changes on fuel mixes are threatening the viability of two of the three main biofuel sectors — biodiesel and next-generation fuels derived from feedstocks other than food. Ethanol, the largest biofuel sector, is also in financial trouble, although longstanding government support will likely protect it.

Earlier this year, GreenHunter Energy Inc., operator of the nation’s largest biodiesel refinery, stopped production and in June said it may have to sell its Houston plant, only a year after politicians presided over its opening. Dozens of other new biodiesel plants, which make a diesel substitute from vegetable oils and animal fats, have stopped operating because biodiesel production is no longer economical.

Producers of next-generation biofuels — those using nonfood renewable materials such as grasses, cornstalks and sugarcane stalks — are finding it tough to attract investment and ramp up production to an industrial scale. The sector suffered a major setback this summer after a federal jury ruled that Cello Energy of Alabama, a plant-fiber-based biofuel producer, had defrauded investors. Backed by venture capitalist Vinod Khosla, Cello was expected to supply 70% of the 100.7 million gallons of cellulosic biofuels that the Environmental Protection Agency planned to blend into the U.S. fuel supply next year. The alleged fraud will almost certainly prevent the EPA from meeting its targets next year, energy analysts say.

Domestically produced biofuels were supposed to be an answer to reducing America’s reliance on foreign oil. In 2007, Congress set targets for the U.S. to blend 36 billion gallons of biofuels a year into the U.S. fuel supply in 2022, from 11.1 billion gallons in 2009. That would increase biofuels’ share of the liquid-fuel mix to roughly 16% from 5%, based on U.S. Energy Information Administration fuel-demand projections.

Corn ethanol, which has been supported by government blending mandates and other subsidies for years, has come under fire for driving up the price of corn and other basic foodstuffs. While it will continue to be produced, corn ethanol’s dominant role in filling the biofuels’ blending mandate was set to shrink through 2022. Cellulosic ethanol, derived from the inedible portions of plants, and other advanced fuels were expected to surpass corn ethanol to fill close to half of all biofuel mandates in that time.

The business models for most biofuel companies were predicated on a much higher price of crude oil, making biofuels more attractive. A government-guaranteed market was also central to business plans.

But once blending mandates were postponed, oil prices plunged and the recession crushed fuel demand, many biodiesel companies started operating in the red. Even ethanol producers, which have enjoyed government subsidies and growing federal requirements to blend it into gasoline, have been operating at a loss over the past year. Numerous established producers have filed for Chapter 11 bankruptcy-court protection.

Critics of the biofuels boom say government support helped create the mess in the first place. In 2007, biofuels including ethanol received $3.25 billion in subsidies and support — more than nuclear, solar or any other energy source, according to the Energy Information Administration. With new stimulus funding, this figure is expected to jump. New Energy Finance Ltd., an alternative-energy research firm, estimates that blending mandates alone would provide over $33 billion in tax credits to the biofuels industry from 2009 through 2013.

Mr. Obama, who supported biofuels throughout his campaign, is working to roll out grants and loan guarantees for bio-refineries and green fuel projects, said Heather Zichal, a White House energy adviser. The pace of the disbursements should speed up this fall, administration officials say.

The European Union dealt the final blow this spring when it slapped a tariff on U.S. biodiesel, killing what had been the industry’s main sales outlet.

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3 thoughts on “U.S. Biofuel Boom Running on Empty”

  1. tim maguire says:

    The problem with doing anything based on the price of oil is that the price of oil is not set by the market in the sense we usually think of market economics, it is set by political realities in oil producing countries. There is some lower bound set by supply and demand and that lower bound may (or may not) be rising, but ultimately we do not know what a market price for oil is.

    Expanding drilling in the U.S., might help the situation, but if we decide to start acting like every other oil producing nation on the planet and drill more, I don’t see this being one of the reasons.

  2. Tim says:

    I can’t recall a program sparked by the US government that was of any true long term benefit to this US of A. Analysts have been trying to predict oil prices since we became dependent on this “black gold”. Making policy based on the many unknowns regarding climate change are of more detriment to our livlihood than all the good intentioned efforts of our ignorant government leaders. The bio-fuels and ethanol programs are again proof that “central planning” by our government is and will continue to be a failure until market forces determine them to be viable energy options period.

  3. tim maguire says:

    I generally agree. There’s a reason five-year plans are in disrepute. Ultimately, necessity really is the mother of invention and to the extent we artificially impose “necessity”, we get an inferior production at a greater cost.

    But I’m intriqued by, a fan of, have a romantic attachment to (take your pick) X-prizes. For some reason, they excite great minds to push the limits of technology at a relative pittance cost-wise. I’d like to see this tool in wider use.

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