OPEC vs. Biofuel?

I've devoted a lot of space this year to "food vs. fuel" concerns about biofuel production, and last month I looked at the possible impact of expanded biofuel mandates on US refinery additions. Now we see OPEC warning that biofuels put their oil expansion plans at risk and coining a lovely new phrase, "security of demand." While it's not hard to see that subsidized ethanol competes directly with the output of expensive new refinery units here, how likely is it that the national oil companies (NOCs) of major producing countries would scale back their oil exploration and production investments out of fear that biofuel will limit their market or profitability?

On the face of it, this notion sounds silly, given the relative scale and economics involved. Total US ethanol production this year is less than the equivalent output of OPEC's smallest crude oil producer, Qatar, even without adjusting for BTU content or energy inputs. And while not all OPEC countries are low-cost producers, there still seems to be a lot of oil remaining in the Middle East that could be developed at costs far lower than any biofuel, including cellulosic ethanol. And even at our targeted 35 billion gallons of biofuel per year, the extra 1.4 million barrels per day of equivalent supply would only cover a fraction of the expected global demand growth over the next couple of decades. There appears to be plenty of room for biofuel and OPEC fuel, unless the global economy slows, or the whole world gets really serious about climate change.

Aside from the obvious PR element of such a comment, there might also be something deeper here that requires a little historical context to interpret. The last time oil prices were this high for this long, things ended badly for OPEC. The combination of price-driven conservation and price-stimulated non-OPEC production started to squeeze OPEC's barrels out of the market and set off a fight for market share that turned a slide into a collapse. Remember "netback pricing?" OPEC's members were suddenly thrown into a world in which access to markets could no longer be taken for granted, and that led to some interesting joint ventures and acquisitions. "Security of demand" evokes that period, and it might be a signal to international companies trying to gain access to OPEC reserves that the price might include guaranteed long-term outlets. That view is reinforced when you see the same OPEC official suggesting the cartel will need to attract foreign capital in order to expand output. The NOCs have many competing calls on their cash flow, besides reinvestment.

If the figures in the Financial Times article are correct, adding another 4 million barrels per day of OPEC production capacity through 2012 at a cost of $130 billion works out to about $2.50/barrel of reserves. At that rate OPEC has much less to fear from competition from biofuel than biofuel investors do from oil price risk. Either OPEC is sending a different message between the lines, or they have tired of being the brunt of all our talk of energy independence.