Does the oil glut spell DOOM, GLOOM or BOOM for alternative fuels?

How does $60 oil impact payback for natgas or hybrid electric vehicles, and cellulosic biofuels?

The going assumption is that low oil prices are bad for alternative fuels — but it’s not always the case.

Consider the competition. Quite a bit of ink has been spilled regarding hybrid electrics and natgas vehicles — as alternatives to petroleum-based cars, and biofuels.

Natgas.

We checked this calculator from CNGnow! This first image we took from the default values on the site, which show annual fuel savings of $2413 and payback in 3.31 years by switching to natural gas.

But how does that look with $2.73 gasoline and slightly higher natgas prices? (In this case, the calculator didn’t allow for anything less than $3.00 gasoline, so we boosted the natgas price by an extra $0.27 to make up the difference).

The results? Not so rosy for natgas conversions. In this case, the fuel savings has dropped to $800 per year and the payback has extended to 10.0 years. Long time to wait to get the money back from an $8,000 conversion.

Bottom line: Gloom.

Hybrid electrics

We checked out this calculator from the Department of Energy. In this model, we chose the Toyota Prius, as an example of a well-known brand. What do we see, based on the $2.68 fuel price the DOE now has as its calculator default?

Bad news for economics-driven buyers. For an owner aiming for a 4-year loan at 4.5% and keeping the vehicle for 5 years (these are the DOE defaults, we didn’t juice the numbers) show an estimated net monthly cost increase of $15.73 until the loan is paid off. But the bad news? Payback takes 5.8 years, or longer than the DOE anticipated the owner would keep the car.

Bottom line: Gloom.

Not a reason not to seek alternatives

Higher costs are no reason, in and of themselves, to avoid alternative vehicles. All alternative vehicles are a good idea, and good for the planet. But, we see that $60 oil is going to offer some challenges in terms of selling consumers on the economics.

Over to cellulosic fuels

Now, let’s look carefully at cellulosic biofuels, specifically at cellulosic biofuels waiver credits, available under the Renewable Fuel Standard in the United States.

Here’s how a waiver credit works.

Each year, the EPA may make Cellulosic Biofuel Waiver Credits available if available production falls short of the schedule set out in the 2007 Energy Independence and Security Act, and we are certainly in one of those “short years” now.

Here’s how a waiver works. In 2010, the EPA made them available at $1.58. Now, each obligated party has to blend a gallon of cellulosic biofuel (up to their obligated amount) — or, alternatively, can buy a waiver credit.

In 2010, the average wholesale price of gasoline was $2.21, which meant that an obligated party could either invest $3.79 ($2.21, the value of the gallon of gasoline and $1.58 for a waiver credit) to sell a gallon of fuel — or buy a gallon of cellulosic biofuel for $3.79 a gallon, or less.

In this way, there’s a price for the cellulosic biofuel market that is transparent to obligated parties, and a price cap, too, to ensure no runaway prices.

Fast forward to 2015

Now, the formula is $3.00 less the wholesale price of gasoline per cellulosic biofuel waiver credit, adjusted for inflation in comparison to calendar year 2008. So let’s adjust that $3.00 to, say, $3.31 to allow for the CPI inflation rate.

The formula for calculating gasoline prices is this:

“The wholesale price of gasoline will be calculated by averaging the most recent twelve monthly values for U.S. Total Gasoline Bulk Sales (Price) by Refiners as provided by the Energy Information Administration that are available as of September 30 of the year preceding the compliance period.”

Based on RBOB wholesale gasoline, the average price for 12 months through September 2014 is $2.85. Which means that the cellulosic biofuel waiver credit should be around $0.46.

Now, RBOB gasoline is trading right now at $1.67, according to EIA spot prices. Which puts a theoretical value of $2.13 per gallon on cellulosic biofuel in 2015, or around $89.46 per 42-gallon barrel. Most technologies say they are competitive with gasoline in the $90-$100 range, excluding subsidy or RIN values.

Bottom line: From gloom to boom.

Fast forward to 2016

Now, the formula remains $3.00 less the wholesale price of gasoline per cellulosic biofuel waiver credit, adjusted for inflation in comparison to calendar year 2008. So let’s adjust that $3.00 to, say, $3.38 to allow for the CPI inflation rate.

We don’t have the full 12 months of data for Oct 2014 – Sept 2015 — so we’ll take the first three months of data (that we do have) and mark that as “to be adjusted later in the year”

The formula for calculating gasoline prices is this:

“The wholesale price of gasoline will be calculated by averaging the most recent twelve monthly values for U.S. Total Gasoline Bulk Sales (Price) by Refiners as provided by the Energy Information Administration that are available as of September 30 of the year preceding the compliance period.”

Based on RBOB wholesale gasoline, the average price for 3 months through mid-December 2014 is $1.99.

Which means that the cellulosic biofuel waiver credit should be around $1.39.

Now, if RBOB gasoline remains at $1.67, that puts a theoretical value of $3.06 per gallon on cellulosic biofuel in 2016, or around $128.52 per 42-gallon barrel.

Bottom line: Boom.

Conclusions from the data

1. Expect tougher selling conditions for natgas and hybrid electric vehicles.

2. There could be boom times for cellulosic biofuels in 2016, and reasonable economics in 2015.

3. Maintaining RFS2 is going to be crucial — otherwise, cellulosic biofuels will be priced out of the market just as US shale oil is getting priced out of the market right now as OPEC drives down the oil price. Leaving the world more dependent than ever on OPEC oil.

4. Cellulosic feedstock may well be at a premium in 2015 and 2016 — depending on how RIN values for advanced biofuels and corn ethanol evolve.

5. As fuel prices decline, fuel consumption is likely to rise, slightly — improving the overall market size for biofuels blends. Both on the biodiesel and ethanol side.