The US government has given significant incentives for the production of biodiesel – but there are concerns in the US that “big business” is now exploiting the generous incentives for their own end – and putting the fledgling industry at risk…

These accusations follow an interesting announcement a couple of weeks ago from oil giant ConocoPhillips, the third-largest US oil group by market cap. The company said it was to team up with meat processing giant Tyson Foods to produce diesel from animal fats from pigs, chickens and cows. Tyson is the world’s-largest manufacturer of processed meat.

If the process works, I think the news is positive for the long-term future of Tyson Foods, a company I have been following closely for a number of years. The company’s share price has recovered significantly over the past 12 months after being hit by rising beef costs after mad cow disease was found in Canadian cattle combined with sluggish sales to hit margins. So, the deal is good for Tyson… But what’s in it for Conoco..?

Over the past month there has been interesting newsflow coming from the oil major. In fact, Conoco’s chief executive James Mulva gave one of the strongest endorsements of global warming that I have heard from a US oilman. In an interview with the McGraw Hill magazine BusinessWeek he said that, "The science [relating to global warming] has become quite compelling".

This was no slip of the tongue, however, or incisive questioning from the BusinessWeek journalist. It was a strategic decision on ConocoPhilips’ part. Consider the April newsflow from the group:

10 April: Conoco unveiled a $22.5m donation to assist Iowa State University to develop fuels out of corn.
11 April: The company said it would support a mandatory national framework to address greenhouse gas emissions and joined the US Climate Action Partnership (USCAP).
16 April: Deal with Tyson Foods unveiled.
19 April: BusinessWeek interview in which Mulva accepted global warming as a fact.

Now, this is all very laudable, particularly when this point of view is compared with that of ExxonMobil - which has been funding groups that aim to debunk global warming as a theory for years - but is it merely a publicity stunt in an attempt to earn some social-awareness brownie points?

Mulva said that he expected that the venture would breakeven, but only with a $1-a-gallon federal subsidy. It is this subsidy that has caused controversy with representatives of the US biodiesel industry. They say that the tax credit given to this project is unfair.

Pressure group the National Biodiesel Board (NBB) has argued that this subsidy is a tax-payer rip off. Detractors say that big oil has managed to pressure the government into giving them tax subsidies that were meant to stimulate a new industry – not subsidise one of the world’s richest and most powerful industries.

Here is the rub…

The fuel resulting from the Tyson deal, strictly speaking, will not be biodiesel. That’s because the fuel will be able to run through existing infrastructure and will be sold as regular diesel. Conoco claims the fuel is chemically equivalent to conventional diesel.

Chief executive of the NBB Joe Jobe said:

"We believe that it's bad public policy for tax payers that are paying as much as $3.00 a gallon for gasoline to have their tax money go to pay them another dollar per gallon to do this".

"This is bad energy policy, bad agricultural policy and bad fiscal policy. If Congress lets this stand, our government will be handing over US taxpayer money to some of the richest companies in the world, and it will not provide many of the benefits that the biodiesel tax incentive has given back to America."

Jobe argued that Congress intended the biodiesel tax credit to spur development of the domestic plant-based biodiesel industry – and this deal does not do that. It is, in effect, a subsidy for big oil that is un-necessary as it jumps on the “clean” energy bandwagon.

However, Jobe claims that the diesel produced in the way does NOT have a better emission profile than standard diesel, which makes sense if it has the same chemical composition of traditional diesel. Biodiesel itself emits fewer emissions. If this is the case, and I do not have any primary scientific research to back this up, then I can see Jobe’s point.

The US 2005 Energy Policy Act allows fuel made from thermal de-polymerization (TDP) to qualify for the same incentive that was created for biodiesel produced from agricultural resources.

The TDP process is a new technology to turn hazardous wastes, plastics, and food wastes into boiler fuel. The US taxman expanded the TDP definition to include the conventional petroleum refining process following a review specifically requested by Conoco.

Jobe also pointed out that there had not been a new traditional petroleum refinery built in the US for more than 30 years, while the biodiesel industry had been investing in new refineries.

All in all, I have a tendency to sympathise with Jobe’s point of view. The Conoco-Tyson deal is interesting in that it created a fuel from a waste product, but it still produces as much greenhouse gas as traditional diesel. I also believe that it is also part of a PR offensive by Conoco.

The oil giant has been holding a series of small meetings with communities all across the US. On 28 April it held a meeting in Rochester, Minnesota. The opening statement from Conoco’s representative Bob Ridge at this meeting was as follows:

"Our industry has lost touch with the public. We did a poll, and we found our credibility was below the tobacco industry. We want to listen."

If I was a US taxpayer, I would be irked that the $1-a-gallon subsidy from the government was given in this case. The technology is not cleaner than ordinary diesel, as agriculturally-derived biodiesels are.

It appears the oil lobbyists still hold much power on Capitol Hill, how much this influence will act to the detriment of the biodiesel industry remains to be seen. I will watch with interest. P.S. If you enjoyed this article then sign up for Smart Commodities UK. It’s dedicated to searching out the investment trends that could provide our biggest profit opportunities for the next decade…

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