Surprisingly, the impact of the COVID-19 pandemic on the biofuel industry appears to be as strong as it is on the oil and gas industry.
Oil and gas companies have experienced significant operational challenges this year on account of the sharp price decline that persisted for several consecutive months and the pandemic-induced recession. To control coronavirus outbreaks, countries have imposed travel restrictions, regional lockdowns, and social distancing rules. At the same time, people have adopted new socioeconomic arrangements such as working from home and online learning. Consequently, the demand for public transportation and air travel has plummeted around the world, thereby dragging down oil demand as well.
Just as the pandemic was ravaging the global economy in the early part of this year, Saudi Arabia and Russia further crippled the oil market with a price war. Oil prices crashed into the negative territory for the first time in history this April 20, when they reached an unprecedented low of negative US$40. Facing such a dramatic downturn, many oil and gas companies that operate in the US have filed for bankruptcy as they are already heavily in debt.
The pandemic and the plunge in oil prices have an unexpected and severely negative effect on the biofuel market as well. Industry analysts have pointed out that biofuel demand has actually fallen for the first time in 20 years. Olivier Lemesle, a director at French research firm Xerfi, told AFP that biofuel is not competitive at the moment because oil prices are too low.
Biofuels, which are mostly made from plants, are regarded as the environment-friendlier alternative to fossil fuels because they are more sustainable in terms of production and emit less greenhouse gases. The development of the biofuel industry has therefore come under increasing attention in recent years as the transition to clean and renewable energies emerge as a global trend. Jean-Phillipe Puig, CEO of French biodiesel producer Avril, said that biofuels will remain as a viable green option in the energy market going forward.
Nevertheless, the industry is struggling. Benoit Pelegrin, a journalist covering the energy industry, reported that the price of biodiesel has been holding steady at US$70 per barrel so far even with the pandemic. In contrast, the price of crude oil has experienced a massive collapse. The price of Brent crude, which is one of the leading market indices, has been staying below US$50 per barrel since early March.
According to the annual report from the International Energy Agency (IEA) for 2020, this year’s global production of biofuels for transportation is projected to drop by 11.6% from the previous year. The biofuel industry will post its first production decline in 20 years and the largest production decline compared with other renewable energy sectors. The IEA report was released this November.
The growth of the biofuel market is constrained by other challenges in addition to low oil prices. First, there are not many participants in the market because the initial investment in setting up the manufacturing process can be a rather high entry barrier. Many biofuel producers first relied on government subsidies to get their operations off the ground. Second, the competition from other energy technologies are fierce. Lithium-ion batteries and hydrogen fuel cells, for instance, are more widely adopted among vehicles because of their technological maturity. Third, planting energy crops that serve as raw materials for manufacturing biofuels can negatively affect food supply and prices. After all, some of these energy crops are also staple crops such as beets, corn, and wheat.
Guy Maisonnier, a member of French research agency IFPEN, suggested that the biofuel industry can capture more market demand by developing solutions for the aviation industry since airplanes do not have as many green energy options as cars.
(Image credit: Pixabay.)
