The ETF Advisor: Energy Edge

The nearly $100 per barrel plunge in oil prices since last summer, coupled with the credit crisis and stock market decline, hit the nascent biofuels industry particularly hard. South Dakota-based VeraSun, one of the largest U.S. biofuel producers, filed for bankruptcy protection in October 2008, and many other producers have either shut down facilities or slashed their output and are struggling to stay in business.

With the economics of biofuels beholden to volatile oil markets, most biofuel production around the world is driven by government mandates and regulations. Through 2008, the U.S. government mandated that oil refiners add an ever-increasing amount of ethanol–a gasoline substitute that in the United States is made primarily from corn–into their fuel blends. No such mandate had existed for biodiesel, which is a version of diesel fuel that is made from vegetable oils and animal fats. As a result, the biodiesel industry languished in relative obscurity, with 2008 U.S. production volumes less than 8% of that for ethanol, according to the National Biodiesel Board (NBB).

Beginning in 2009, however, the Renewable Fuels Standard (RFS) will require oil companies to blend increasing amounts of biodiesel, in addition to ethanol, into their fuels. And while that may not turn the industry around in the near future, Standard & Poor’s Equity Research thinks it may serve to tide the industry over until oil prices rise again and make the product more competitive.

“Biodiesel has a lot of potential,” says Tina Vital, equity oil analyst for Standard & Poor’s. “Recent studies indicate that biodiesel has a higher energy yield than ethanol and, on combustion, results in less greenhouse gas emissions than ethanol.”

Why Biodiesel Is Attractive