Ethanol Has OPEC Publicly Concerned

Abdalla El-Badri, Secretary-General of the Organization of the Petroleum Exporting Countries [OPEC] said the biofuel strategy being pushed by President Bush and European leaders would backfire because “you don’t get the incremental oil and you don’t get the ethanol." In this scenario, he warned, oil prices would go “through the roof.”

He said OPEC members had so far maintained their investment plans, but he warned: “If we are unable to see a security of demand . . . we may revisit investment in the long-term.” Why the change? In the past OPEC had all but mocked biofuel's potential. This is the first public expression of concern.

“They are really concerned,” said Julian Lee of the Center for Global Energy Studies in London. “OPEC will continue investing, but with biofuels on the horizon, they may not invest enough.”

OPEC is caught between a rock and hard place. On the one hand, if they keep prices high like they have become accustomed to, the rest of the world will continue its quest for alternative sources. Should they ramp up production to bring prices down in an attempt to make biofuel's cost prohibitive, their wallets suffer. What to do?

I think if anything, this is proof positive that oil production is currently at a peak level. If OPEC could, it would flush the world with oil, dampen its desire for alternative sources and make them less profitable. The fact that they haven't means they can't.

Here is another odd point. With OPEC clearly scared about both the current reality and the future surrounding ethanol, why are US ethanol makers currently nowhere near 52 week highs? When you have the US and Brazil, who between them produce over 10 billion gallons a year of the stuff rushing to partner production practices, shouldn't that excite us? When the world's #1 producer of biodiesel, Archer Daniels Midland Company (ADM) has set up shop in Brazil, will produce biodiesel there in August and is aggressively seeking an ethanol partnership, ought we not be more positive about the future of these companies?

Let's not forget that other US Agribusiness companies like Bunge Limited (BG) and Corn Products International (CPO) are in the process of producing from South America also.

Here is another miscellaneous thought. If the Dems take the White House (and even possibly if they do not), oil companies like Exxon Mobil (XOM), Chevron (CVR) and BP (BP) will once again find them selves in front of congress answering for record profits and high gas prices. Dems have wanted to grab some of these profits for years and may soon be in a position to actually do it. Can you think of anything that would get any one of them off the hook faster than being able to say "We are also the #1 (or #2) ethanol producer in the US"? With half the ethanol sector near 52 week lows, valuations are ripe for buyouts by big oil flush with cash, looking for some real nice PR in their commercials and as a way to protect their profits from congress's hands.

When you have the organization that controls 40% of the world's oil publicly worried about ethanol, I find the current apathy towards companies that produce it odd. Maybe that is what a value investor is: finding the value in what others overlook.

Comments

[Tom B:]

Todd, yes, it is clear world oil production has peaked. It is a finite resource. But, regardless of that fact, I think we all need to step back from ethanol production as an investment and contemplate it as a technology. Making ethanol from corn is a bad, bad, bad, stupid idea. Politicians who advocate corn subsidies should have their brains washed out with soap. You have essentially ZERO gain in energy if you factor in all steps of the process. Ethanol from plant waste or switch grass or some crop that doesn't suck up massive quantities of nitrogen fertilizer may be a different beast. Thus, I would advocate looking to see what the feeedstock for any ethanol company looks like before investing.

As Exxon, etc. I advocate the US nationalizing oil production, but I know that has no chance of happening with our politicians all "on the take" from Big Oil.

2007 Jun 11 08:53 AM

[todd su:]

Thomas,

I think in order to get to "z", we need to start at "a" and corn ethanol is just that. yield are improving everyday and the cellulose technology is only a couple of years away. we can do it now, just not as cheaply as corn. the cost is falling regularly though and it is not a question of "if" but "when". ADM is in the game here now and based on their past, they do not bet on anything that is not almost a sure thing

2007 Jun 11 10:43 AM

[Tom B:]

What ADM mostly bets on is that they'll find adequate numbers of thoroughly corrupt legislators. Are you willing to bet that ADM won't squash attempts to switch from corn to less monopolized crops?

2007 Jun 11 01:07 PM

[todd su:]

see today's ADM hire at the blog. their ideal would be to use cellulose technology to utilize the whole corn stock and triple yields...

this is not far away....

2007 Jun 11 06:30 PM

[insideoil:]

Todd, maybe, just maybe, with present high costs of construction and the shortage of qualified people to do the work, the IOC's and NOC's are biding their time to see if prices will remain this high ( fear of recession dropping demand , or competition from substitution by ethanol). What incentive is there to invest in projects that have tripled in capital cost in the last three years - without certainty on return for the lifetime of the project (20 years).

Also what incentive to invest at all if you know you will remain mega profitable if the current growth continues. No one can ramp up faster or cheaper supposedly to meet this growth than OPEC, and many that claim they have added reserves either do not have it or will have to pay substantially in ultra high capex costs to get the product available. What incentive can there possibly be to challenge the status quo.

The fear of facing a drop in demand from recession - is no real challenge - as it will under such circumstances be possible to build new capacity for a more reasonable capital price. The NOC's are effectively neutral to the cost/benefit of making investments under growth or recession circumstances.To invest however when costs are high and the potential exists for prices to fall sharply once you have spent the capital makes little sense strategically as it high risk, with no added benefit.

OPEC is no charity - they will do what makes sound investment sense for them. I doubt they have any major concern over a growth slowdown. Fact is they know the customers are short, but they are still willing and able to pay the price. So until the USA really does something significant like decrease fuel consumption per mile, I very much doubt OPEC is going to be overly concerned. If the USA cannot even get a few refineries built - then I guess there is not much for oil providers to worry about nuclear or coal exploitation - which anyway will take 6-8 years to bring on-line. Plenty of warning time for OPEC to crank up output - if they can that is !!

Short term output increase is a dream - there is nothing in it for any of the players - so the price will crank up until the consumer pops. Be they American, Chinese, Japanese, Indian or whatever. The only fear America should have is that the Russians are also making a ton of money, and are rebuilding their country to be a formidable future competitor on a global basis.

2007 Jun 12 08:56 AM