Oil price slump taking a toll on U.S. alternative fuels

By: Nichola Groom, Jan 9th, 2015

(Reuters) - With gas pump prices lingering near their lowest levels in five years, greener, cleaner alternative fuels are taking a hit.

Makers of biodiesel, a fuel made from vegetable oil or animal fats, are slashing prices and margins in a bid to stay competitive with the price of diesel fuel, which is down more than 20 percent from a year ago.

Shippers are delaying purchases of trucks that run on naturalgas, and sales of electric vehicles are down, while demand for less fuel-efficient SUVs is up.

Wall Street is also punishing the sector. The WilderHill Clean Energy index, which tracks everything from renewable power producers to solar panel makers, is down 36 percent after hitting a three-year high last March.

"The producers have to be getting murdered," said Steven Boyd, senior managing director at Sun Coast Resources Inc., a Houston-based distributor of petroleum and alternative fuels. "And the consumer puts a smile on his face and drives down the road another mile."

Lower oil prices have had little impact on "green electricity," including solar and wind power, which compete with power generated by low-cost natural gas. But businesses connected to alternative transportation are feeling the squeeze.

Blue Ridge Biofuels, a small biodiesel producer in Asheville, North Carolina, that makes its product from used restaurant cooking oil, says sales at its four retail gas stations in the area are down 40 percent since July. Biodiesel prices at those stations have fallen to $3.29 a gallon from around $4.15 in September, yet it is still more expensive than diesel, which is currently selling for around $2.93 a gallon there.

"There is another station across the street," said Woody Eaton, Blue Ridge's chief executive, and customers "can see the price difference."

The biofuels industry is still tiny, but government mandates have underpinned its growth in recent years. Production of biodiesel has risen steadily, climbing to nearly 1.8 billion gallons in 2013 from 1.1 billion gallons in 2012, according to the National Biodiesel Board.

But it will be difficult for any new production to come online this year given the business climate, said Joe Gershen, vice chairman of the California Biodiesel Alliance.

SHRINKING MARGINS

Makers of corn-based ethanol are feeling a similar squeeze. Low corn prices pushed U.S. ethanol production to record levels last year, with producers enjoying robust margins. Corn has rebounded about 25 percent since October, however, while ethanol selling prices are down as stockpiles of the fuel have surged.

"We still see a positive margin, but not nearly what we saw last calendar year and last quarter," said Jim Seurer, CEO of Glacial Lakes Energy LLC, an ethanol producer based in Watertown, South Dakota. Seurer said he has no plans to scale back production as long as margins remain positive.

Though larger than the biodiesel sector, ethanol still represents a tiny fraction of the U.S. fuels market. The U.S. consumed about 18.96 million barrels of oil per day last year, with ethanol accounting for about 888,000 of those barrels.

NATURAL GAS Vs. DIESEL

Using natural gas as a replacement for diesel in heavy duty operations also has less appeal these days. The trucking industry in recent years has been adopting natural gas as a fuel for its vehicles. But while natural gas is still cheaper than diesel, the slimmer price differential means it will take longer for truckers to recover the roughly $50,000 added cost of a natural gas truck.

"Right now there is no way we could buy a natural gas truck," said Jeff Shefchik, president of Paper Transport Inc, a trucking company based in Green Bay, Wisconsin, that operates 100 natural gas trucks and 350 diesel trucks.

Shefchik, who began buying natural gas trucks in 2010, said he will buy 100 trucks this year. All of them will be diesel.

Top U.S. truck brands including Freightliner, Volvo and Mack said they expect demand fornatural gas trucks to slow.

"We have seen customers that we thought would have pulled the trigger by now say 'We're just going to hold off a little bit and watch what fuel pricing does,'" said Robert Carrick,natural gas sales manager for Freightliner, a brand owned by top U.S. truck maker Daimler Trucks North America LLC.

Natural gas truck sales will likely be steady this year across the industry, Carrick said, after growing about 50 percent a year since 2012.

Sales of electric vehicles are also down. A tiny slice of the overall auto market, electric vehicle sales slid 6 percent in the fourth quarter of 2014, to 31,294, according to a report by financial services firm Cowen and Company. Tesla Motors Inc, the U.S. electric car maker, has not disclosed its sales for the period, but its share price has dropped 27 percent since hitting a year high in September.

Meanwhile, low oil prices have spurred sales of pickup trucks and large SUVs like General Motors Co's GMC Sierra and Fiat Chrysler Automobiles' Ram Truck. Sales of those brands soared more than 30 percent in December.

(Reporting By Nichola Groom; Editing by Eric Effron and Tomasz Janowski)