Saturday, June 9, 2007

Ethanol Has OPEC Publicly Worried

Abdalla El-Badri, Secretary-General of the Organization of the Petroleum Exporting Countries (OPEC) said the biofuel strategy being pushed by President Bush and European leaders would backfire because “you don’t get the incremental oil and you don’t get the ethanol”. In this scenario, he warned, oil prices would go “through the roof”.

He said OPEC members had so far maintained their investment plans but he warned: “If we are unable to see a security of demand...we may revisit investment in the long-term.” Why the change? In the past OPEC had all but mocked biofuel's potential. This is the first public expression of concern.

“They are really concerned,” said Julian Lee of the Center for Global Energy Studies in London. “Opec will continue investing, but with biofuels on the horizon, they may not invest enough.”

OPEC is caught between a rock and hard place. On the one hand,if they keep prices high like they have become accustomed to, the rest of the world will continue it's quest for alternative sources. Should they ramp up production to bring prices down in an attempt to make biofuels cost prohibitive, their wallets suffer. What to do?

I think if anything this is proof positive that oil production is currently at a peak level. If OPEC could, it would flush the world with oil and dampen it's desire for alternative sources and make them less profitable. The fact that they haven't means they can't.

Here is another odd point. With OPEC clearly scared about both the current reality and the future surrounding ethanol, why are US ethanol makers currently nowhere near 52 week highs? When you have the US and Brazil, who between them produce over 10 billion gallons a year of the stuff rushing to partner production practices, shouldn't that excite us? When the world's #1 producer of biodiesel, ADM (ADM) has set up shop in Brazil, will produce biodiesel there in August and is aggressively seeking an ethanol partnership, ought we not be more positive about the future of these companies?

Let's not forget other US Agribusiness companies like Bunge (BG) and Corn Products (CPO) are in the process of producing from South America also.

Here is another miscellaneous thought. If the Dems take the White House (and even possibly if they do not) oil companies like Exxon (XOM), Chevron (CVR), and BP (BP) will once again find them selves in front of congress answering for record profits and high gas prices. Dems have wanted to grab some of these profits for years and may soon be in a position to actually do it. Can you think of anything that would get anyone of them off the hook faster than being able to say "We are also the #1 (or #2) ethanol producer in the US"? With half the ethanol sector near 52 week lows, valuations are ripe for buyouts by big oil flush with cash, looking for some real nice PR in their commercials and as a way to protect their profits from congress's hands.

When you have the organization that controls 40% of the world's oil publicly worried about ethanol, I find the current apathy towards companies that produce it odd. Maybe that is what a value investor is, finding the value in what others overlook.

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