14.12.14

FORMERLY UNAVAILABLE AT ANY PRICE.

Oil price movements, like any other price movements, produce positive and negative pecuniary externalities.  Sure, filling the land yacht at two bucks a gallon is as close as we're likely to get Happy Days are Here Again, but falling crude prices do turn inframarginal and substitute producers into inactive producers.
The concern is that crude prices could fall so low, demand for alternative energy sources would evaporate and the growth of the U.S. oil patch, which has helped lead the country back from one of its worst-ever economic downturns, might slow or even stop.

"This is clearly a mixed bag for the U.S. because a large percentage of U.S. job growth since the credit crisis has happened in the energy sector, and that growth could halt or reverse if oil prices stay low for long," said Ethan Bellamy, managing director and chief oil industry analyst at Milwaukee-based Robert W. Baird & Co.
On the other hand, that's new capacity, and it doesn't just go away when crude prices fall.  The same thing is true of the renewable substitutes that have appeared over the past quarter century.
Companies in the petroleum sector plan for volatility, said Lee Edwards, chief executive of Virent Inc. in Madison and a former executive at BP in Houston.

"It'll go up, it'll go down, and we're trying to build our business models so we are independent of that volatility," he said.

Renewable energy's feedstocks also can have volatile price swings, Edwards said, noting the price of corn, the primary ingredient in ethanol, has fallen from more than $8 in August 2012 to below $3.50 this fall.

"For us and many in the biorenewable space, we have to look at the volatility of crude oil relative to the volatility of the feedstocks we're converting," he said.

Virent is a spinout from the University of Wisconsin-Madison. The company is attempting to commercialize the processes that produce a plant-based substitute for transportation fuels and chemicals that are now derived from oil.

The bioenergy firm uses "Virent is replacing crude oil" in its branding, but doing so is no easy task, especially when crude approaches $55 a barrel as it did on Friday.

The company shifted its emphasis in recent years to renewable chemicals from renewable fuels, although it's still pursuing both.

"It's a lot easier to get interest in this space when crude oil is over $100," Edwards said.

Virent said last week it has expanded its lineup of renewable chemicals used to make products sourced from petroleum — everything from foam in car seats to polyester in clothing to components of wall insulation.
I hope the reporter misquoted that "build our business models so we are independent of volatility," as any business using crude oil or a crude oil substitute is going to be affected by price movements in crude oil, and if your feedstock is corn, the principle of substitutes works in precisely the way that the story relates.  Thus a successful business model more likely makes good use of futures markets for feedstocks, and devotes resources to getting down the learning curve.
While sales of electric vehicles and hybrids are likely to be pressured by low oil prices, development of alternative energy sources will continue amid tougher greenhouse gas and pollution standards being adopted around the world.

"So even if the fuel prices stay low, the emissions regulations continue to get more and more stringent," said MaryAnn Wright, vice president of engineering and product development for the battery business of Johnson Controls in Glendale.

Johnson Controls is working on developing lithium next-generation car batteries to help automakers meet those standards, but its focus for now is helping the auto industry get better mileage out of cars with internal combustion engines.
The regulations are unlikely to go away, and there;s still a strong constituency for technology forcing regulations. There's also an opportunity. What happens if the substitutes are able to compete at $70 crude?  That's one possibility if the kleptocrats running OPEC decide to restrict output so as to be able to raise prices.  Their problem: some of those startups can cover running costs at such prices, and the substitutes have that learning curve working in their favor.

No comments: