The World Bank said Tuesday that low oil prices have hurt demand for renewable fuel.
Even while the bank’s latest commodity outlook is raising its oil price projections from $41 to $43 per barrel, it still sees fossil fuel prices remaining at decade lows into 2017.
“We expect slightly higher oil prices for the second half of 2016 as oil market oversupply diminishes,” said John Baffes, senior economist at the bank and lead author of the Commodities Markets Outlook. “However, inventories remain very large and will take some time to be drawn down,” which means the price shift will be slight at best.
Without paying much attention to the global oil glut, which has caused U.S. shale oil companies to cut hundreds of thousands of jobs in the last year, the outlook suggests another casualty of low oil prices could be looming: biofuel production.
“Lower energy prices have also eased pressures to produce biofuels as an alternative energy source,” said a summary of the bank’s new outlook. “Biofuels production has been an important driver of demand growth for food commodities in the past decade,” but now demand for such fuels as ethanol is plateauing.
Governments — the European Union, the U.S., and Brazil, primarily — have programs to produce ethanol, biodiesel and other more advanced fuels when oil prices were high to decouple themselves from the global oil price and become energy independent.
The World Bank said the lower cost of oil, coal and natural gas has driven down prices for almost all other goods, as well, such as agricultural commodities in addition to metals. With prices low for corn, soy and sugar cane, for example, there is less incentive to produce the crops required to make biofuels.
“What our report says is that lower oil prices may reduce policy pressures to divert agricultural commodities to biofuels production,” because as the report shows “growth in biofuels production has plateaued,” said a World Bank official on background.
The low price of oil reduces the cost of producing all agricultural commodities, including corn and oil seeds, which are used to produce biofuels, the official said. “However, production of biofuels is driven by policies aimed at reducing dependence on imported oil, not profitability. Therefore, the fact that lower energy prices lower the cost of agricultural commodities will not necessarily drive greater biofuels production.”
Lower oil prices have driven U.S. consumers to buy less fuel-efficient vehicles, while at the same time the relative improvement in vehicle efficiency has made it tougher for U.S. clean-fuel programs to meet their annual blending goals. Since ethanol use is attached to gasoline consumption, fuel-sipping cars have made it harder to reach the volumetric goals of the nation’s biofuel program.
The situation has made the Environmental Protection Agency’s flagship biofuel program, the Renewable Fuel Standard, vulnerable to calls for Congress to repeal the mandate. On Monday, the free-market Competitive Enterprise Institute issued a report calling for the repeal of the RFS going into a heated election season.
“Congress should repeal the Renewable Fuel Standard so that consumer preference and competition, rather than central planning policies, determine which fuels succeed or fail in the U.S. marketplace,” said Marlo Lewis, the group’s senior fellow and author of the report.
The World Bank warns that countries that have become over-dependent on energy and agricultural exports for their livelihood must learn to diversify. This was seen recently when oil giant Saudi Arabia, which relied on oil as its sole resource for decades, issued a plan to diversify its economy given how the global oil glut is hurting its finances.
The bank suggests Gulf and Mideast oil producers may be losing their relevance in an era of low energy prices. On Thursday, it will issue a report called “Whither Oil Prices?”
The report “examines the fundamental changes in the behavior of market players and whether the oil market will rebalance over the long term,” the bank said Tuesday. “The report will also address whether the prospect of sustained, low oil prices will lead to a new social contract in the Middle East and North Africa region.”
Ayhan Kose, director of the World Bank’s Development Prospects Group, said “energy exporting emerging and developing economies have struggled to adjust to persistently low prices.”
“Both energy and agricultural commodity exporting countries need to step up economic diversification efforts to bolster resilience to commodity price fluctuations,” Kose said.
