Plunging Oil Prices Require Alternative Fuel Startups to Take a Long View

Historic high prices for petroleum over the past decade have stoked a surge of interest in alternative fuels and renewable energy, and dozens of startups have been formed to develop new technologies in the field.Now this year’s extraordinary spike in crude oil prices is being matched by an equally spectacular swoon. Crude oil prices fell to $50.77 a barrel on the New York Mercantile Exchange yesterday, and shows the average price for a gallon of regular gasoline is $1.87 nationwide.

So what do plunging fuel prices mean for biofuel startups?

I raised the question in an e-mail to Jason Pyle, founding CEO of San Diego’s Sapphire Energy, which has been at the center of intense interest since the startup announced a breakthrough in using algae to make “green crude” identical to crude oil. Sapphire also has the sort of pedigree that turns heads. Sapphire announced in September it has raised more than $100 million from Bill Gates’ venture fund, Cascade Investment, as well as Seattle-based Arch Venture Partners, Venrock and Wellcome Trust.

The critical thing to keep in mind, Pyle says, is that it’s imperative for the United States to develop new sources of energy—and that process will take years, even decades.

“The price of oil does impact immediate thinking about where some investors will put their money,” Pyle wrote. “Investing in the right kinds of emerging energy products is a highly leveraged bet on the long-term growth of the world-wide economy.”

Of course, investments in biofuels companies developing ethanol fuels produced from corn and other food crops appear now to be the wrong kind of bet. VeraSun, one of the nation’s largest ethanol producers, filed for bankruptcy protection last month after betting the wrong way on corn prices. We reported that Seattle’s Imperium Renewables had to raise additional capital last month following some business reversals. It is the largest biofuel plant in the U.S. and uses either soy or canola as its base stock for making biodiesel fuel.

Congressional subsidies that favor some alternative fuels are a sore point for Pyle, who told me earlier this month it’s also imperative for policy-makers to “level the playing field” to ensure that the best alternative energy technologies prevail.

Sapphire became an overnight leader in biofuels development in May when it came out of stealth mode to say it had proven the feasibility of using algae to make “green crude” that can serve as an identical substitute for crude oil.

I took Pyle’s answer to mean that the success of Sapphire’s “renewable gasoline” depends on longer-term trends—such as declining global crude production and a push for cleaner-burning fuels—and not on transitory swings in volatile commodities markets.

I sought a second opinion from Bilal Zuberi, who specializes in cleantech investments at Cambridge, MA-based venture firm General Catalyst Partners. “We’re not at all unhappy” about plunging oil prices, Zuberi told me. “The hotness of the market will go away, so we’ll start to see more realistic valuations.”

Zuberi adds, though, that startups developing alternative fuels technologies will have to show they can be financially viable even if crude oil prices slip as low as $40 a barrel.

Pyle’s point, of course, is that even if crude prices fall more in the short term, they will only rise over time. “After we recover from the current financial debacle, expanding economies will outpace available energy supplies again,” Sapphire’s Pyle says. “The tight margin between production and demand will cause another price run up. Nations who plan for the long term are doubling their efforts to secure energy sources during these times, not pulling back.”

As an aside, Pyle says, “This is another example of a real problem with our current domestic thinking. We as Americans need to become far less focused on instantaneous cost and instantaneous profits. We need to think about how our debt is fueling a frightening foreign trade gap that is leading this nation into long-term decline. The people who built this great country used to value their decisions by the impact it would have on their children; now we have business leaders and policy makers that have a hard time thinking beyond the next quarter, next day or next 15 minutes. It’s how we ended up with the worst financial blunder in the nation’s history.”

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at or call (619) 669-8788 Follow @bvbigelow

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