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The U.S. Ethanol Industry Is Under Attack

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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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New Biofuels Alternative Could Upend Oil Markets

Before solar power, electric cars, and even fracking the hot topics in energy were ethanol and other biofuels, which were touted as a way to help get oil prices under control. In 2007 and 2008 as WTI and Brent prices approached $150 a barrel, biofuels were widely seen as a possible future substitute for conventional crude.

That prospect didn’t work out quite the way some experts thought it would, and the economic recession and proliferation of shale oil drilling would ultimately drive prices down to their current state. Now MIT has developed a new technology that looks likely to bury biofuels, and potentially to take a swipe at oil as well. Related: Supply Outages in OPEC Countries Push Up Oil Prices

The MIT project turns emissions from power stations, steel mills, garbage dumps, and other waste gas producers into liquid fuels using engineered microbes. Garbage dumps have been used for a while now to produce electricity, but that process requires burning the gas itself, which is not always economical. The process is also criticized by environmentalists for adding to global warming. What differentiates MIT’s approach is that the gas produced by emissions sources is used for liquid fuels that in theory can substitute for conventional crude in transportation needs.

The technology is on display in a large-scale pilot facility in China, which makes sense given the number of garbage dumps, steel mills, and power stations there. China’s ongoing issues with pollution certainly makes the technology attractive given the extremely toxic air that permeates Beijing and much of the most populated areas of China. Related: What Happens When Oil Hits $50?

The MIT project came out of a PhD doctoral dissertation a few years ago, and MIT still holds patents on the technology, but it is licensing that tech to the Chinese. The ding on biofuels is that they are not cost competitive with oil in many cases, but that reality varies widely over time and by region. When oil was over $100 a barrel, many types of biofuels were economically viable. Now with oil at present levels, almost no biofuels make sense on an economic basis.

Nonetheless, biofuels might still make sense in China. Chinese cars are inefficient and lack the pollution control technology of U.S. and European vehicles. Combining this factor with the sheer number of vehicles on the road means that cars are a major contributor to the unhealthy levels of smog in major Chinese cities. In other words, the cost of driving a car in China is greater than just the cost of the gasoline in the tank – the millions of vehicles all add to air pollution quality that makes the city unhealthy. Related: Have Oil Markets Grown Numb To Supply Disruptions?

For that reason, biofuels that reduce pollution and smog would probably make sense even if they were more expensive than conventional gas. The U.S. and Europe don’t have the same level of pollution problems that China does (or India might develop in the next decade), so the technology is probably not as valuable or likely to have an impact here.

It remains to be seen if MIT’s technology will ultimately change the way the Chinese (or anyone else) drives, but there is definite potential. The process has been through testing both at the lab level and in small-scale commercial operations. If the current larger commercial testing goes well, it’s entirely possible that in 3-4 years, numerous dumps and steel mills across China could be using the technology. That outcome would be bad for oil, but it might also be a death knell for the already struggling biofuel industry.

By Michael McDonald of Oilprice.com

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