Monday, August 3, 2009

Exxon and Biofuels

Exxon is creating a joint venture with Synthetic Genomics, a biotech firm, in the hopes of turning algae into an alternative fuel. Of the factors that are mentioned by Exxon as to why they will invest in algae is scale. This is a typically problem for most alternative fuels. While it is possible to turn corn (or other food products) into fuel, the scale that must be undertaken is enormous, and what we have seen is that the demand for corn starts to make other goods (especially food) much more expensive, and that is not an alternative path that society seems willing to follow.

One of the things that bothers me about organizations like Greenpeace, is that they state that oil companies need to be more active in developing alternative fuels. Yet, my reaction is that Exxon is a publicly owned firm, and thus has a fiduciary duty to the shareholders, and if the shareholders are more interested in their return on investment then Exxon is right to focus on petroleum related products as the return on investment is much higher than in alternative fuels. If the return on investment on alternative fuels starts to increase, then Exxon will gradually shift from a petroleum oriented energy firm to an alternative energy oriented energy firm. My view is that Exxon sees the now is the right time to be investing in alternative fuels as the switching point toward gradually increasing demand for alternative fuels is in the horizon, although BP - once the leader in alternative fuel development is retrenching back towards petroleum.

Another thing that bugs me about environmental groups like Greenpeace is that they have no problem in spending other people's money. Calling for oil companies to invest more in alternative energy when their current core business products are petroleum-based is asking a firm to develop substitutes for their core business model, which will only make the firm weaker in terms of profitability. If enviromental groups think that alterative fuels - or whatever - is the right path to take (and I am not disagreeing that this is true), then in a market economy, let those groups take the risk and start to develop a firm to create alternative fuel products. This environmental groups do not do, for a lot of reasons, but would truly be the solution to market imperfections - such as not enough alternative fuels in the market place.

No comments: