The Prospects for Biofuel Stocks
Henry Ford had the right idea when he designed the Model T—it was a flex-fuel vehicle that could run on gasoline or ethanol. Today, biofuels are not a simple substitute for fossil energy—we don’t have enough farm land, for one thing—but they can certainly be combined with other fuels in a diverse energy portfolio.
Proponents have been pushing biofuels into the American consciousness for years, but it took rocketing gas prices and the unstable Mideast to create a corn rush. Over the past year, biofuels have come into their own, riding on the promise that they can help wean us from foreign oil, boost our rural economy and lower greenhouse gas emissions.
Farmers, agriculture conglomerates and investors have all made serious commitments to biofuels. Some 44 ethanol plants are under construction, bringing the national total to more than 1,000.
Since March 2006, more than 40 biofuel companies have been listed on the world’s public markets. Six countries have policies in place to promote biofuels and another dozen are developing them. The European Union wants biofuels to make up 5.75 percent of transport fuels by 2010, and 20 percent by 2020.
Unlike such renewable energy sources as solar and wind, biofuels compete directly with fossil fuels in transportation, which uses 60 percent of our oil. They can be distributed through our current transportation infrastructure and used in conventional engines. The fuel is biodegradable, lowers greenhouse gas emissions and improves engine lubrication. The price is competitive with gasoline when oil is at $45 per barrel or above.
The U.S. is the world’s second-largest producer of ethanol, which it derives from corn. Unfortunately, much of the U.S. corn crop is already pledged to food production. Currently, about 14 percent of the corn crop is used to make ethanol, which is three percent of the nation’s fuel supply.
And questions remain. Since most corn and soy for fuel is produced the cheapest possible way—in genetically modified monocultures, grown with petroleum-based fertilizers and lots of pesticides—what are the ramifications for soil erosion, air and water pollution? And what about ethanol plants powered with dirty coal energy?
Some observers see promise in "cellulosic" ethanol, which uses agricultural wastes and other plant matter as its "feedstock." The production process to convert this cellulosic waste is more expensive, but a pilot plant is up and running in Canada and others are on the way. The U.S. Department of Energy estimates that 60 billion gallons of ethanol fuel could be made each year from crop waste, wood, grass and other plant fiber.
The most exciting developments may come from algae: a single acre can produce 15,000 gallons of biodiesel, vastly trumping soy (50 gallons per acre) and even the very promising Carribean plant jatropha (also called psychic nut, and capable of producing 200 gallons per acre). Companies are also starting to create closed-loop systems in which animal manure or landfill gas is used to run the plants.
Six months ago, investors piled into biofuels stocks as if facing the next dot-com boom, creating an artificial price spike. But now, corn prices are rising because of demand and more meager harvests are forecast. Share prices have fallen and public offerings have been postponed.
Standard & Poors rates biofuel investments as "extremely speculative." Some of the favorites are Environmental Power Corporation (AMEX:EPG), which produces methane from animal and farm waste and turns it into biogas, and Great Britain’s D1 Oils (DOO.L), which derives biodiesel from the Jatropha tree. Willie Nelson’s Texas-based Earth Biofuels (EBOF.OB) operates biodiesel plants that use soy and rapeseed as feedstocks for a fuel sold as "BioWillie." Nova Biosource Fuels (NVBF.OB) can use any grease or fat waste to make cheap diesel.
Another way to invest is to buy stock in established suppliers such as Novozymes A/S (NZYMb.PK), based in Denmark. It’s the world leader in biologically derived industrial enzymes. The company reduced the cost of converting biomass to fuel 12-fold, to under 50 cents per gallon.
Abengoa (ABG.MC), based in Spain, is the world’s second-largest ethanol producer and is building the world’s first commercial-scale biomass plant. Abengoa has a contract with Canada’s SunOpta (Nasdaq: STKL) to use its "steam explosion" process, which breaks down biomass.
Biofuels are embraced by every sector of society with the hope of lowering carbon dioxide (CO2) emissions, set to double by 2030.
RONA FRIED runs SustainableBusiness.com.