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Wednesday, August 19, 2015

The "Crack Cocaine and Heroin" Solution -- Biofuels -- August 19, 2015

Ask 1,000 analysts why Saudi is doing what they are doing, and you will get 1,500 answers. The best answer, of course, is the "crack cocaine and heroin" answer I provided some time ago. If you don't believe me, see the McGraw Hill financial report: a convergence of factors could have US biofuel producers scrambling.
Not long ago, biofuels were viewed as an important tool for mitigating oil price spikes and for limiting carbon emissions from the transportation sector. But recent events, policies, and trends have conspired to make the near future somewhat murkier for U.S. ethanol producers, and the market has taken notice.
More recently, several Presidential hopefuls have begun positioning themselves for a run at the White House by disparaging the current Administration's energy policies with claims of onerous government intrusion, job losses, and stunted economic growth. Despite these tactics, there is continued support for the ethanol industry from both parties, which resonates with residents of Iowa, an early bellwether Presidential caucus state. For many years, the federal government and numerous state governments have supported the biofuels industry with policies that have spurred domestic production and consumption of ethanol and limited imports. But in recent months, this has swelled into a full-blown controversy, especially amid crude oil prices that make the economic case for renewable fuels less compelling.
Of course, there is still a long track record of such incentives being renewed and even strengthened, and discussions about their discontinuation are only preliminary at this point. They are still subject to rigorous review, and to political gamesmanship in Washington. But if these discussions materialize, the harvest could happen soon because public sentiment may be turning and several issuers could see their credit quality change--however, the direction of that change can differ based on the nature of the issuer.
In coming months, Standard & Poor's Ratings Services expects certain factors to potentially weaken credit quality for ethanol producers. The industry has relied on a unique blend of economics and politics to sustain itself for many years, and recent developments may call both into question. Furthermore, our criteria continue to focus on technological capacity, and it's not clear yet that second-generation biofuels can meet expected standards, despite considerable fervor for their expansion.
Much, much more at the link. (Archived.)

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