Billions of gallons of fuel refined from cooking oil, french fry grease, landfills, and farm byproducts are being pumped into the engines of American vehicles every year. As long as people keep planting corn and eating fast food, there’s no imminent shortage of oil to pump into tanks. But there has been a shortage of cash to pay for it lately, stalling the industry’s growth and raising questions about its future.
Following a selloff in the industry that has pushed several stocks down more than 20% in the past year, some analysts now see buying opportunities. Among the names that are receiving positive buzz are Darling Ingredients DAR –2.08% (ticker: DAR) and Opal Fuels OPAL –3.66% (OPAL).
The industry’s problems stem from upheaval in the market for carbon credits. California’s Low Carbon Fuel Standard, which went into effect in 2011, has been a key growth driver for the industry. It is designed to lower the overall carbon intensity of transportation fuels used in the state by establishing a credit and debit system for fuels. To comply, carbon emitters such as refiners need to produce cleaner fuels or buy enough credits from renewable fuel producers to offset their greenhouse gases. It’s so important to the biofuels industry—paying out an average of $4.3 billion annually over the past three years—that nearly all the renewable diesel produced in the country gets shipped to California to take advantage of it. But the value of the credits has fallen steadily since 2020—they’re paying out 63% less per ton than they did at their peak because of an oversupply. With more credits being produced than carbon-emitters need to buy, the value of each credit has declined.
The federal government has been running its own clean-fuels program since 2005, requiring that refiners blend certain renewable fuels into gasoline and diesel or pay for credits. But the Environmental Protection Agency’s latest clean fuel volume mandates are lower than some producers had hoped, and credit prices have slipped for products such as biogas.
Avi Salzman, barrons.com
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