The novel coronavirus has fundamentally changed the way that we consume energy and fuel around the world. The extreme and unanticipated slowdown of economy and industry has led to a sharp decrease in oil and gas demand, and has even led many to question whether we are now unequivocally headed toward “the end of oil.” While a move away from fossil fuels has been an inevitable side effect of the pandemic, many global leaders have suggested that the world should seize this opportunity to double down on the global green energy transition by implementing policy measures and encouraging ESG investments. Indeed, many countries are already in the process of drafting “green” stimulus packages as part of a movement to redirect the global economy toward decarbonization and build what the World Economic Forum has advocated as a “new energy order” and a “great reset.”
While this is extremely hopeful news for a planet facing all the problems associated with climate change, it is decidedly terrible news for the oil industry, and especially the long-suffering shale industry in the United States, which has been in a state of severe decline for years now. Few sectors were hit as hard by the pandemic as U.S. shale, which saw its West Texas Intermediate crude benchmark plunge into negative figures in a previously unthinkable turn of events on April 20th, ending the day at nearly $40 below zero.
In the absence of gasoline demand, refineries have been casting around for alternate solutions to keep their plants up and running, and it looks like they may have found the answer: biofuels. Early on in the pandemic’s trajectory, things looked just as bad for the biofuel sector as nearly every other economic sector - which is to say, pretty dismal. While it may seem like fossil fuel and biofuels would be natural competitors, the oil price crash actually posed a great threat to biofuel markets as well. “Crude’s nosedive erases any chance of discretionary blending of palm oil with diesel, and drastically inflates the cost of government mandates,” reported Bloomberg back in March. “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.”
Now, however, the tide could be turning for biofuels thanks to oil refineries’ newfound thirst for fuel production of any form. And those aforementioned government subsidies don’t hurt either. In one example Phillips 66 announced its intention to convert a Bay Area oil refinery to a facility capable of biofuels production sourced from used cooking oil and animal fat. “Refiners like Phillips 66 are turning to biofuels and the valuable government credits that come with them to prop up sagging revenues as a surge in the coronavirus cases drives renewed government restrictions and lower demand for gasoline and diesel,” the Houston Chronicle reported this week in an article headlined “With COVID dragging down gasoline demand, refineries look to biofuels to prop them up.”
At present, the profit margins on biofuels are too tempting for many oil refineries to overlook, especially with peak oil looming right around the corner. In fact, there is such a rush on used cooking oils and animal fats that some renewable refineries have reported having trouble procuring these once worthless feedstocks. On top of making good financial sense, there’s also the fact that jumping on the ESG investment train is more buzzworthy and marketable to shareholders than ever. This is highlighted by the statement of Phillips 66’s CEO Greg Garland who referenced their nascent Bay Area refinery-turned-biofuels plant as “a great example of how Phillips 66 is making investments in the energy transition that will create long term value for our shareholders.”
Ultimately, you’d be hard-pressed to find a better metaphor for the green energy transition and the “end of oil” than veteran oil refiners fighting over used cooking oil to create biofuel as oil prices languish in the background.
By Haley Zaremba for Oilprice.com
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