This month’s unprecedented oil crash has sent shockwaves through the entire energy industry and beyond. It’s even gotten to industries that, in theory should be dancing on oil’s grave, but, in reality could be going down with it. Biofuels markets across the world are reeling from the oil crash this week, from Brazil to Malaysia. In Brazil, the corn ethanol industry has been a historically resilient one. “It withstood a downward currency spiral, economic malaise, a jump in raw-material costs and political upheaval,” said a report earlier this week from Bloomberg Green, a “new multiplatform editorial brand focused on climate change news, analysis, and solutions” which debuted in January. “Now one of Brazil’s booming industries has finally met the foe that could take it down: the oil crash.”
It may seem counterintuitive that the oil crash would negatively impact biofuel, which in many cases is its direct competition. This is especially true in Brazil, where most drivers have flex-fuel vehicles, which means that their car could just as easily run on biofuel as it could on traditional gasoline. But most biofuel is blended in with regular gasoline or diesel, and low energy prices are causing turmoil across the board.
“Margins for the grain-based biofuel have already turned negative in Goias state, where a third of the nation’s plants are based,” said Bloomberg Green, paraphrasing the words of Matheus Costa, an analyst at INTL FCStone. And the worst is yet to come if energy prices stay as low as they are now. Another industry expert, Guilherme Nolasco, president Unem, told Bloomberg Green that “as many as 60 per cent of planned expansion projects could be scrapped.”
Meanwhile, in Asia, things are looking similarly grim for the biofuel sector for all the same reasons. “Crude’s nosedive erases any chance of discretionary blending of palm oil with diesel, and drastically inflates the cost of government mandates,” reported Bloomberg’s main platform in a separate story last week. “Biofuels, such as a blend of diesel with palm, need to be attractively priced compared with fossil fuels to encourage consumption, and that often requires subsidies.”
Last Monday, the Brent crude benchmark plummeted by a devastating near 25 per cent. This spelled out big problems for palm oil’s ability to compete. While oil has since recovered a bit after the initial shock (although it’s nowhere near where it was before the crash) “palm oil is still about US$200 a tonne more expensive than gasoil, as diesel is also known, the widest premium in more than three years.” This will have grave impacts on the demand for biofuel in Indonesia and Malaysia.
This crash is an abrupt change of pace for global biofuels markets, which have been in a huge upswing as of late. In Brazil, “money had been flooding into the sector as companies like Cargill Inc worked to increase capacity amid roaring demand for renewable fuel.” Production is high and was set to get much, mucher higher. “Earlier in 2020, FCStone predicted corn-ethanol output in the upcoming 2020-2021 season would jump to 2.5 billion litres. That would have been up more than 16-fold from about 150 million litres just five years ago.” But is a slowdown in biofuel production really an environmental tragedy?
As Bloomberg’s “Crude oil’s crash jeopardises Asia’s cleaner fuel ambitions” headline would suggest, some are seeing this as a major step back in the effort to curb greenhouse gas emissions. But the sustainability of biofuel is much more complicated than that. Palm oil’s track record in Indonesia and Malaysia is not a particularly positive one, where it is responsible for devastating amounts of deforestation and damage to important natural habitats. The situation in Brazil is not much better, where monocropping of corn, sugarcane, and soy, all of which are used for Brazilian biofuels, each contribute to deforestation of the Amazon rainforest, often referred to as the earth’s lungs. While reducing consumption of fossil fuels is all well and good, it’s a moot point if doing so is cutting down some of the most important sites of carbon sequestration that we have.
By Haley Zaremba for Oilprice.com
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