Credit Crunch Snares Biofuel Industry

Biodiesel is caught in the middle of two tough financial developments — the credit crisis and high commodity prices. Both are helping to make biodiesel more expensive than regular diesel. What do the high prices mean for the industry?

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RENEE MONTAGNE, host:

The credit crisis is taking a toll on young companies that depend on loans and venture capital to keep growing. One industry that's facing a funding squeeze is the business of biofuels. Think ethanol or biodiesel. Just last year, biofuels were riding a boom. Now they're struggling, as NPR's Martin Kaste reports from Seattle.

MARTIN KASTE: This was supposed to be biodiesel's time to shine. With petroleum through the roof and regular diesel breaking records at the pump, people using biodiesel should've been entitled to a nice hearty...

(Soundbite of TV show "The Simpsons")

Ms. NANCY CARTWRIGHT: (As Nelson) Ha-ha.

KASTE: But there's no gloating here at the Propel Biofuel station in Seattle. Ross Parker has just filled up his truck with biodiesel made from canola oil.

Mr. ROSS PARKER: About $140 for not a full tank.

KASTE: Wow. And we're talking per gallon right now?

Mr. PARKER: About $5.06.

KASTE: That's a dollar more per gallon than the regular diesel selling down the street. So even with record oil prices, biodiesel still costs more, a lot more.

Mr. PARKER: It's getting really tough to be good.

KASTE: The biofuels industry is caught in a squeeze. On one side, market prices for soybeans, corn and other crops that go into the fuels have been skyrocketing. On the other side, the credit crisis is making it harder for these young companies to raise more money to get through the tough times.

VeraSun, a company that makes corn ethanol, has seen its stock price drop by half just this year. And other biofuels companies have canceled plans to go public.

Mr. TED SULLIVAN (Analyst, Lux Research): The difference is shocking. Biofuels is barely mentioned today, whereas it was pretty much constant about a year ago.

KASTE: Ted Sullivan analyzes the alternative energy business for Lux Research. He says recent bad news has soured many investors. Besides the rising commodities prices, there are new studies suggesting biofuels, especially corn ethanol, are less green than advertised. Sullivan says investors are even wondering whether ethanol and biodiesel will continue being supported by the government.

(Soundbite of laughter)

Mr. SULLIVAN: Those other subsidies are fickle. So you look at the wind industry in the early 1990s and Congress pulled support and then put it back for the wind industry four times.

KASTE: Last year, the Seattle-based company Imperium Renewables was making news with its ambitious expansion plans. It built the country's biggest biodiesel plant on the coast of Washington, and it said it would build three more around the world with the help of a $345 million stock offering. But now those plans are on hold. The company says market conditions just aren't right.

Still, founder and CEO John Plaza denies investors are turning against biofuels.

Mr. JOHN PLAZA (CEO, Imperium Renewables): The anti-biofuels sort of talk that's happening over on the fringe, is it important? Yes. The importance of it is to help shape the industry to success, not to kill the industry. And I don't think it will kill the industry.

KASTE: Plaza says he's looking forward to the day when his company can move away from food crops. There's even the possibility of making biodiesel from algae. But right now, his customers are stuck burning fuel made from some expensive agricultural commodities.

Mr. PLAZA: We can't just give up. This is a nascent industry in the beginning stages of real commercial development. And to give up on it because it's slightly more expensive is giving into the oil complex.

KASTE: Plaza says he'll keep fueling his car with biodiesel regardless of cost. It's a philosophy he has to hope is shared by his customers.

Martin Kaste, NPR News, Seattle.

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