The price of oil has dipped to levels that could be far too low for many advanced-biofuel startups to succeed, especially those that attracted investment this summer, while oil was well above $100 a barrel. Tight credit markets will also make it difficult for advanced biofuel companies to move ahead with plans for scaling up technologies and building commercial-scale production plants.
Attempts at developing alternative fuels in the 1980s largely failed after oil prices plummeted, and the recent drop in oil prices has many concerned that something similar could happen today. On Friday, the price of oil had fallen to $40.81 a barrel, down from a high of $145 in July. Those earlier high oil prices led venture capitalists to invest in many companies that would require high prices of oil to compete, says David Berry, a partner at Flagship Ventures. This summer, he says, “people were very happy to say, ‘We’re targeting $80 a barrel for oil, and we think we’re going to make a ton of money.’”
This September, at the EmTech08 conference, Berry predicted that if oil prices were to fall, many of these companies could fold. His own company, Flagship Ventures, has invested only in biofuel startups whose breakeven requires oil prices of $45 or lower. “When we thought about investments, we said we’re not going to make a single investment in something that has its break-even point above $45 a barrel,” he said, speaking in September. “In that way, we think we can be pretty insensitive to what the price of oil will be over time. If the price of oil falls to $60 or $50, from our perspective, we’re going to sit here and say, this is where we thought things might end up.”
Berry now says, however, that most of the companies that Flagship has invested in will still be able to hit the break-even point with oil prices lower than $45. One of these companies, Boston, MA-based Mascoma, could still make a profit with oil at $20 a barrel, says Bruce Jamerson, Mascoma’s CEO, but only because current government incentives help them compete with gasoline. These include a $1.01 subsidy for every gallon of advanced biofuels, fuels made from nonfood crops, as well as federal regulations that require oil companies to sell certain amounts of advanced biofuels.