Wednesday, November 12, 2014

Jatropha: Will low crude kill the interest?

Background

While India and all other oil importing countries are celebrating the drop in crude oil prices, there is one industry in the early phase will see a set-back. That is bio-fuels. All the interest in bio-fuels was due to consistent rise in crude oil prices. There was search for alternate fuels. And bio-fuels seemed to be the answer. Ethanol blending began couple of years ago. Since most of Ethanol is made out of Sugar crop, there was fear that it will lead to shortage of sugar and drive the food prices high. Then the interest turned towards Jatropha, which is a non-food crop and can be grown in semi and non-arable farmlands. It seemed perfect to make bio-diesel out of Jatrpoha seeds. It will reduce oil imports, saves foreign exchange, create jobs in the homeland where there is so much of unemployment and non-arable land. Govt. announced subsidies, organizations began spreading the knowledge, pilot projects kick-started and there were research projects taken up to improve yield of Jatropha crop.

Jatropha farm and its seeds

Bio-fuel economics under threat

Most of the bio-fuel business models assumed crude oil prices remaining high or going up further. Now that crude prices are down (30% approx.), and there seems to be no hurry in getting back to earlier prices as the crude oil capacity is on the rise and demand is not catching up at the same pace.
To keep up with the fall in crude and to make economic sense, yields from Jatropha crop has to go up by at least 30% or so. When the pilot projects are not yet proven for their feasibility, this additional expectation is a burden on the economics of Jatropha crop.

In another development, natural gas (CNG, LNG, LPG) vehicles are becoming popular. An increasing number of vehicles worldwide are being manufactured to run on natural gas. The trend is likely to catch up further as many countries would like make use the new gas discoveries and the biggest of them is USA with their shale gas exploration. As more and more natural gas run cars hit the roads, demand for bio-fuel fades away.


Conclusion

As bio-diesel loses its price competency against the conventional crude oil, Jatropha farmers (there are not many) will find fewer and fewer takers for their crop. An industry in its infancy will face a survival threat. Jatropha seemed to be a solution to isolate from geo-politics for India but when oil producing countries are offering a discount for their natural resource, geo-politics lost its power to influence crude pricing.


 For now it appears that Jatropha has hit a road block. Unless the crude prices come back or Govt. offers further incentives or any improvement in the yield in Jatropha is seen, Jatropha farmers need to stay cautious.