Oil, Biomass, Carbon – The Value Story and a Look through the Lens of Price

by Jim Lane (Biofuels Digest) ... So, producers band together to limit production and raise prices in the short term and oil-field value in the long-term. Cartels generally do a much better job of limiting production than the free market does. The free market· generally raises production until it meets the cost of production plus the cost of capital — or, seeks to add supply from alternative sources, such as renewables. In a world where Saudi Arabia can produce from its established fields at $3 per barrel and the risk-free capital cost is less than 4 percent, cartel value looms large as a driver of oil prices, for now.

Then there’s the currency value, because oil prices are expressed in dollars, which means that there’s no currency effect for Americans or those with currencies pegged to the dollar, but for 96 percent of the world’s population. the local price of oil changes every time the currency moves.

Oil’s been sliding lately, after West Texas Intermediate reached a high of $76 in October, it’s down to $51 today. Brent Crude peaked at $86 in early October and has slid to $60 today. Averaged out over the year, Brent’s been around $70 and WTI at around $61.

Carbon prices

Carbon prices are a nascent market, not exactly as mysterious as bitcoin, but certainly the price of carbon is swinging wildly depending on where you live because some regimes have no carbon prices and others have formidable ones. Some are hidden inside mandates, too. A 10 percent requirement for fuels that have, say, a 25 percent reduction in carbon-related emissions creates a market for carbon, albeit small.

There’s an argument that carbon markets should be sharply limited at first — rising geometrically rather than arithmetically over time to meet the world’s carbon goals.

The important point is that, especially in the case of California, what is driving up the carbon price are the scarcity of alternative fuels, because carbon prices rise when supply is low. When there are 10 times as many gallons available of low-carbon fuels, the carbon price will be 10 times lower, in theory. So, pioneers have huge incentives equal to around $400 carbon prices, that subside in deployment down to prices more in line with that $30-$40 carbon prices that are at the high end of most political regimes to tolerate carbon prices.

The tricky part is having a variable carbon price. There’s no point in offering a pioneer low-carbon project the benefits of a $40 carbon price, or political regimes that expect to consider carbon prices as a tax that flows into general revenues and can be used to support other social projects. There will be little or no project construction where incumbents have simply to pay a $40 carbon penalty which is likely just passed on to the consumer — the incentive to invest in project construction is just not there for investors.

But $400 carbon prices for pioneer developers is moving the needle, there are more than one dozen low-carbon projects in development for the California market right now. That’s a refinery construction pace not seen in that part of the world since the California oil boom of a century ago. While none of these projects are as large as major oil refineries, some of them approach the scale of small oil refineries. The Dickinson ND refinery is being converted to renewables, and the old Paramount refinery in Los Angeles, too.

The trick of course is to find a way to continue to bring forward projects as deployment spreads and the carbon price (expressed on a per project basis) comes down. You want to have a situation where there’s more construction at $100 carbon than there was at $400, and still more at $40 — rather than simply installing a set of pioneer-stage first-of-kind biorefineries and then not building any more.

Biofuels prices

Somewhere in between the petroleum price and the carbon price is the biofuels price. It is an energy form with advantages in carbon, so it is not exactly one or the other. Biofuels are an alternative or supplement to carbon pricing, and an alternative or supplement to petroleum, both at the same time.

Accordingly, the biofuels price tells us much of how we compare the value of carbon and the value of energy. A high biofuels price relative to energy tells us that carbon’s component is rising in importance in the marketplace, while a low biofuels price relative to energy tells us that carbon is fading in market power. READ MORE