Biofuels: Where Woodstock Meets Wall Street

The biofuels industry in the U.S. and worldwide is experiencing internet-era, gold-rush euphoria. The two primary components of biofuels — ethanol and biodiesel — are businesses. However, they are also highly political in nature.

The business side of biofuels is straight-forward and easy to understand. Produce biofuels at a competitive price, distribute to customers, gain market share, repeat. Since biodiesel and ethanol are more expensive to produce than gasoline and diesel, political support is often needed.

In the U.S. and Europe, this economic support generally comes from some form of political initiative, mandate, target, or regulation in the form of a biofuels production tax incentive (U.S.), or a retail biofuels tax break (Germany). In fact, the Europeans produce and consume more than 80% of all of the biodiesel in the world. This has occurred mostly due to government mandates and tax incentives.

In the U.S., these tax incentives have contributed to 150%+ growth in the biodiesel market from 25 millions produced in 2004 to 75 million in 2005 to over 250 million gallons in 2006. That is a 1000% increase from 2004 to 2006. And it is about to get bigger. Much bigger.

Enter Mr. Dubya (a.k.a. President George W. Bush). Hated by liberals, loved by energy companies. He has confessed “the United States is addicted to oil.” Dubya? Did he say that? Yes he did. This happened primarily because of national security (military) and economic security concerns, as well as environmental concerns. Dubya has revised our government’s biofuels transportation initiative (the RFS), to stimulate growth in the ethanol and biodiesel markets by upping the ante and creating a “20 by 10” plan, or to replace 20% of our transportation fuels in the next 10 years with ethanol and biodiesel.

This is the most ambitious plan in the world for biofuels. Even bigger than Brazil and Europe. Welcome to the “new normal.” Dubya is now the champion of biofuels. Al Gore keeps his Oscar. Everyone wins.

So, how do we meet the “20 by 10” target? Woodstock, meet Wall Street. Wall Street, meet Woodstock. An unholy alliance of characters is merging to promote biofuels. On the left, we have actor Woody Harrelson, Barack Obama, and Tom Daschle. On the right, we have Dubya, his brother Jeb (a founder of the Inter-Americas Ethanol Commission), the former CIA director James Woolsey, a Christian coalition for environmental protection, and yes – believe it or not – Chevron, Marathon, Shell and British Petroleum all participating and actively promoting the biofuels sector for various business and regulatory reasons. Politics makes strange bed fellows.

My company, Emerging Markets Online, has sponsored three Biodiesel Investor Conferences, as well as ethanol events. I have witnessed something strange happening as the years go by. At the biofuels conferences in 2005, there were more overalls, t-shirts and jeans than suits. In late 2006, and now 2007, I’ve been seeing more suits and polo-logos than t-shirts and overalls.

There are many investors who are supporting the biofuels industry for profit and other reasons. Goldman Sachs is among one of the biggest. Chevron, Marathon, etc. too. VCs, often referred to as “Vulture Capitalists” also smell blood in the water and are showing up in hordes greater than Dead-Heads at Burning Man and Bonaroo festivals.
source: Ethanol 2020: A Global Market Survey

 

There is a new corporate mantra in the industry. General Electric is citing their new motto “Green is Green”-the idea is catchy and growing almost as fast as the biofuels market.

Celebrity status in biofuels is also a big deal. Willie Nelson’s farm-friendly “BioWillie” biodiesel is going corporate, and being franchised. Celebrities like Larry Hagman (JR from Dallas), Daryll Hannah and former Dallas Cowboys coach Barry Switzer are now being hired by biodiesel and ethanol companies to promote the brands.

The corporatization of biofuels is helping to drive biofuels to the pump, the consumer, and meet Dubya’s (and Daschle’s) ambitious plan to replace 20% of our petrol fuels with biofuels. This is roughly the same amount the U.S. imports from Saudi Arabia, and almost the same amount we import from Venezuela. Each of these countries have the potential to disrupt the U.S. military and economy as we know it.

And it’s not likely Bush and Venezuelan President Hugo Chavez will kiss and make up any time soon. Next year, Hillary or Barak probably won’t have much luck with Chavez either. So leading up to the 2008 U.S. presidential elections, energy independence will be a vital issue in the debates. Both parties will support it, but for perhaps different reasons.

One party will cry foul about war for oil in Iraq, and cite other, environmental reasons. The other party will emphasize national security and economic security concerns, and promote biofuels trade with Brazil, Europe and Asia. Either way, biofuels will win. Or will it?

Production Tax Incentives vs. Petroleum Tax
Biofuels production tax incentives by the U.S. and other countries have created an internet-like investment frenzy. Under the U.S. mandate, biodiesel can be produced at up to $0.99 per gallon tax credit, and ethanol can be produced at up to $0.51 per gallon tax credit.

How did the U.S. biodiesel industry get from 25 million gallons in 2004 to over 250 million gallons (1000% growth) in just two years? Federal tax production incentives.
source: Biodiesel 2020: A Global Market Survey

 

In the next 16 months leading up to the elections, we will hear about some “villains” concerning our energy policies. These villains apparently sent us to war in Iraq, make unconscionable petrol profits, and are contributing to expensive prices at the pump to the demise of soccer moms and middle Americans everywhere. Hillary Clinton has a plan to penalize these “villains” with a petroleum tax.

Although Hillary is a bright woman with incredible political powers and credentials, will her villainization of the oil companies pay off for consumers? Or will this just help Hillary get more votes in a presidential election year?

History provides an answer. Rewind to four years ago, review and take a look at why the biodiesel and ethanol industries have been such a gold-rush and success in recent years. It is due to political measures, mandates and targets leading to the production tax incentives, primarily for biodiesel and ethanol companies. Now oil companies are starting to show up at the party with Chevron leading the pack. Arnold Schwarzenegger is even driving his biodiesel-fueled Hummer to the party. Houston, do we have a problem? Perhaps some are becoming part of the solution.

Fast forward to 10 years from now. Where will we buy our ethanol and biodiesel? This will most likely be at Chevron, Shell, BP and Exxon stations. Rewind to the 2008 pre-election debates, and some energy proposals on the table leading up to the election. Will a petroleum profits tax penalty help or hurt the growth of the ethanol and biodiesel industries? What is a probable outcome from these petrol taxes?

If you like what happened in the 70s with higher oil prices, inflation and economic stagnation (stagflation), and long-lines at the pump, a “petroleum tax penalty” might just lead us back in that direction. Not so good for farmers, our economy, consumers, soccer moms, truckers, etc. It sure will get some votes from people who don’t like the oil companies and who love to cheer for their favorite team, the D’s (a.k.a. Democrat’s).

But despite our innate human desire to cheer for a team like the D’s or the R’s, we should really be cheering for the B’s-the biofuels advocates, like Al Gore, Dubya and BioWillie who are part of the energy independence solutions instead of part of the problem. They are walking the walk, not just talking the talk. Why? Tax incentives for biodiesel and ethanol companies, are good and we will be able to fill ‘er up with cleaner fuels at more petrol stations if these tax incentives continue.

Alternatively, tax penalties are bad. They will detract us from realizing our dreams of energy independence, and lead us to the same gasoline prices of $8 a gallon in the UK and $7 a gallon in Italy, which we Americans will find it hard to buy apple pies, baseball tickets and Chevrolets at those prices. However, some politicians will find more votes by sending us a cheap petrol tax pitch. In this case, it is a curveball.

When the pre-election cycle starts gaining steam, and the rhetoric heats up, let’s remember that renewable energy is an “everybody” issue. Voting for your team D or R is analogous to soccer-hooliganism or fighting for your favorite football team. Six days out of the week, most of us are rational, caring, friendly, loving type of people. On Saturday or Sunday, when the game is on, we turn into rabid, carnivorous, blood-thirsty beasts; put on our war paint, and go fight for our team. Literally.

Energy is such an emotional and political hot potato in the U.S. that the discussion can be distorted beyond any form of cognitive reality-and send us into the stratosphere of ideological derision. This is especially true for biofuels, ethanol and biodiesel. Let’s not let our emotions get the best of us when it comes to the contributions biofuels and renewable energy will make to national, economic and environmental security and clean air.

Let’s all come together, have a group hug, and make biofuels (and all renewables for that matter) an issue we all can agree on. Otherwise, it’s $8 gas for U.S. consumers and no pocket change left over for baseball and an apple pie on Saturday.

For more information on the Biodiesel 2020 and Ethanol 2020 studies referenced in this article, visit Emerging Markets Online.

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Will Thurmond is the founder and CEO of Emerging Markets Online, a market research and consulting services firm serving the needs of clients in biofuels, oil, gas, government, R&D, and economic development initiatives. Emerging Markets provides start-up ventures, investors, governments, petrochems, and EPCs with results-driven consulting services on emerging opportunities in bioenergy and technology commercialization. Mr. Thurmond brings 20 years experience to this position, and has started three consulting firms as an entrepreneur and chief rainmaker. Mr. Thurmond has consulted dozens of Fortune 500 and emerging tech companies in global biofuels, oil, gas, electric power, telecom, international trade and cleantech commercialization. Mr. Thurmond is frequently a keynote speaker at industry conferences, and is the author of Algae 2020 Vol 2: Biofuels, Drop-In Fuels and Market Forecasts (385 pages, 2011) and Biodiesel 2020: A Global Market Survey, 2nd edition(685 pages, 2008). Mr. Thurmond formerly served as Chairman of Research and Development for the National Algae Association from 2008-2009, and currently serves on the advisory boards of the Greater Houston Partnership's Biofuels Task Force, start-up incubator Houston Technology Center's energy advisors, and the American Biofuels Council's Commercialization and Development advisory board. Mr. Thurmond is a member of The International Association for Energy Economics, the World Affairs Council, and the Association of Professional Futurists Under Mr. Thurmond’s direction, Emerging Markets Online has received Forbesmagazine's distinguished "Best of The Web" award 10 years in a row, alongside FinancialTimes.com and Standard & Poors, and has contributed original articles, data, interviews cited in the Wall Street Journal, Financial Times, Forbes, BusinessWeek; was titled "Mr Biodiesel" in 2007 by Fox News Radio's "Energy Week"; and has been featured in TV interviews with Reuters, Fox, CNN, BBC, and NPR. Mr. Thurmond holds an M.S., Strategic Foresight and Studies of The Future from The University of Houston; and earned a B.A, International Relations and Economics from Rollins College.

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