The Strange Relationship Between Oil Prices, Tariffs and Biobased Innovation

Oil prices have been rather volatile as of late, and are hovering around $58/bbl, down from an average of $65/bbl in 2018.  Oil prices impact a lot of things, one of which is the drive to innovate new biobased products from non-petroleum based materials.

When the price of oil is high, we expect the demand to increase for biobased chemicals and products that can be used as replacements for petroleum, because they become relatively cheaper.  The highly cyclical nature of oil prices suggests that prices may have reached a low and are likely to increase again.   As oil prices increase, the barriers to biobased ethanol producers using first-and second-generation feedstocks will decrease.  Currently, producers are struggling to survive with the existing profit margins and they are receiving very low payments for their products, regardless of whether the products are used as additives or as fuels.  This has made the business environment very challenging.

Low margins tend to diminish investment in future business, so it is more important than ever to take a long-term view of biobased technology.  Government incentives seeking to encourage investments in these technologies are critically important at this time because it is virtually certain that the outlook for these technologies will be more favorable from the long-term perspective.

As oil prices increase, large companies are increasingly focused on making more investments in the biobased chemicals sector and enhancing their production capacity in this sector.  This is evident in the on-going mergers of Dow Chemical and DuPont to produce a division focused on biobased technologies, as well as other investment strategies in the works at BASF, Bayer AG, Eastman Chemical Company, and other leaders in the chemical industry.

But wait, there is another factor to consider:  tariffs!  As I discussed with a reporter from the News and Observer, tariffs could become part of the “new normal” that we will see as part of the emerging global trade wars.  This would mean that tariffs would continue to impact China’s demand of soybean and other crops, driving the prices of these crops lower.  Although this is bad for farmers in the short-run, it could also mean lower prices of feedstocks used to create biobased products, making the cost of these feedstocks more competitive vis-a-vis oil-based feedstocks.  So this may be an opportune time for innovators to consider biobased chemicals and others as alternatives…

We are seeing more and more biobased products show up in the marketplace, including soy-based headliners in Ford cars, Procter & Gamble detergent, Reebok shoes, and Goodyear tires.  The number of innovations is growing in this space, and will continue to expand.  However, an important lesson for innovators in this space is to understand that biobased products must compete on the basis of cost AND performance, and must be held to the same benchmarks that petroleum-based products are, or they will not survive in the brutal marketplace.  And that depends to some extent on oil prices.

I believe that oil prices will eventually start to increase and will have a positive impact on the biobased products industry because often, the overall investments made in petrochemical plants and in biobased product development come from the same companies and investors.  Even though many view the two industries as competitors, there are strong ties between them.

Investors, as well as the public, sometimes think that biobased products cost more than their petroleum-based counterparts do.  Several third-party studies have been conducted, and the results support the contention that biobased products sequester carbon and have more favorable LCAs than non-biobased products.  In fact, a 2015 Argonne National Laboratory report indicated that all biobased products they research that have a fossil-based counterpart exhibited reduced cradle-to-grave GHG emissions reductions ranging from 27% to 86%.^[1]  Additionally, life cycle assessment models that incorporate biogenic carbon storage show even higher environmental performance.^[2]  Recent interviews our research team conducted on a USDA study of biobased products suggest that industry executives are beginning to understand how efficient the chemical transition from sugar to plastic is, and these processes should become cost competitive when they are scaled up.  However, to achieve this, biobased product producers must collaborate with investors who have a long-term view and who will invest in efficient facilities and eventually find their functional fit in the marketplace.

[1] Dunn, J., Adom, F., Han, J., and Snyder, S. “A Life Cycle analysis of Bioproducts and Their Conventional Counterparts in GREET™”, Argonne National Laboratory, last updated 9/30/15, https://greet.es.anl.gov/publication-bioproducts-lca.

[2] Pawelzik, P., Carus, M., Hotchkiss, J., Narayan, R., Selke, S., Wellisch, M., Weiss, M., and Patel, M.K. “Critical aspects in the life cycle assessment (LCA) of bio-based materials – Reviewing methodologies and deriving recommendations”, Resources, Conservation and Recycling 73 (2013): 211-228.