The oil company declared its traditional business was all but over. “The demand for fossil oil products will continue to decline,” it said in late 2020 as the pandemic slashed consumption. Even when Covid-19 is over, consumption wouldn’t “recover to previous levels.”
The solution? Abandon fossil fuels and pivot to biofuels. That’s exactly what oil refiner Neste Oyj did. For a while, investors loved the shift: It was the peak of the environmental, social and governance (ESG) bubble, when money poured into anything with the slightest shade of green. The company’s market value roughly doubled to more than $60 billion from mid-2020 to mid-2021. But soon it became clear that oil wasn’t going away.
Now, the hangover. After the stock market debacle for wind companies in 2023, the biofuel sector is the next deflating green bubble. The industry is battling several problems: significant cost overruns and engineering shortcomings, and a glut of biofuels as rosy forecasts for demand never materialized. Oil consumption, instead, is rising. Biofuel margins have tumbled.
Neste is paradigmatic: Its market value has plunged more than 75% to about $15 billion. Green Plains Inc., one of the largest US ethanol makers, has seen its shares halve over the last year.1 Others have fared worse: Several companies have either filed for bankruptcy or are teetering on the verge of collapse. Fulcrum BioEnergy Inc., an American company that raised $1 billion in funding — from BP Plc, among others — with the promise to turn waste into green jet fuel has effectively stopped operating.
Major energy companies that also embraced biofuels are scaling back their bets. In one of the most striking examples, Shell Plc last week said it was halting the construction of what was meant to be one of the largest biofuel plants in Europe. The pause, as the company called it, came remarkably late — the factory was due to start churning biofuel by late this year. Shell expects to take a writedown of as much as $1 billion as a result. Chevron Corp., which in 2022 bought the Renewable Energy Group for $3.15 billion in cash, closed two plants earlier this year due to what it described as poor market conditions.
The problem is that the 2020-2022 biofuel stock mania rested on a faulty assumption — that the world of Covid-19 was the new normal. Rather, the steep drop in fossil-fuel consumption then was simply the reflection of lockdowns, rather than acceleration in the energy transition. Contrary to what some magazine covers foolishly predicted, oil demand hadn’t peaked. As soon as economies reopened, citizens traveled again with a vengeance. Oil consumption jumped.
By 2023, oil demand had hit an all-time high, reaching more than 102 million barrels a day, compared with an average of about 100.5 million in 2019. Under even conservative forecasts, global oil demand will post annual record highs every year until the end of the decade, climbing to more than 105 million barrels a day by 2029, according to the International Energy Agency.
Thus, the world is today consuming more gasoline, diesel, and jet fuel than ever. Their green equivalents are costly, with prices two to six times higher, according to industry estimates. Only government blending mandates and tax breaks sustain their consumption. Both are at risk of policy U-turns, particularly as green-skeptic governments are gaining power in Europe.
Demand isn’t the only problem. The rush to build biofuel plants, particularly in China, has created a wave of supply that has depressed prices elsewhere, hurting the profitability of projects. American and European companies complain about unfair Chinese competition — another sign of the geopolitical green rivalry.
In America, the biofuel industry has suffered as the price of compliance credits, one of its key revenue streams, has plunged. The US government mandates refiners to blend biofuels into gasoline and diesel or, alternatively, purchase credits called renewable identification numbers, or RINs, as an offset. Over the last year, the two RIN price benchmarks have fallen about 60%. Low RIN prices depress biofuel margins, limiting investing.
Not everyone is retreating. BP has canceled some projects, but at the same time it’s also doubling down on investment in biofuels in Brazil, one of the countries with the cheapest cost of production, plus a reliable local demand. In the US, several oil refiners have converted old plants into biofuel factories, capitalizing on federal biofuel mandates. For others, the key is to slow down projects, delaying them a few years. The bet is simple: US and Europe will stick to their blending mandates, with demand increasing toward the end of the decade.
It is, however, a risky gamble. Elections on both sides of the Atlantic may bring in governments hostile to the sector. The biofuel industry made a mistake in 2020 betting that oil was over; it should not make another one now of betting blindly on never-ending government support.
1. In an emailed statement, Neste said: "In the long term, we continue to believe that the demand for fossil fuels in our key markets will decline and that our strategy focusing on renewable and circular solutions is the right one."
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