Two Companies Profiting From the "Fuel of the Future"
by Louise Harris, Investment U Research
October 5, 2009
You don't have to look far to find one of today's big economic and market buzz phrases: Green investing.
From green clothing websites, to CNN headlines heralding biofuel, companies are trying their best to capitalize on growing consumer sensitivity to the environment.
However, like the dotcom era before it, some of the green craze is no more than a speculative bubble. But many of it is the real deal. And despite past debacles, biofuels fall into the latter category.
A Deal With Dow
Take start-up company Cavitation Technologies Inc. (OTC: CVAT), which develops equipment that turns vegetable products into viable fuel. Only established in 2006, it just entered into a long-term agreement with Dow Chemical Co. (NYSE: DOW) to develop projects in Argentina and Latin America.
The deal works well for both companies, since Dow hopes to improve its image through a measurable round of good publicity. It's received a bad rap in the past, due to its work with cancer-inducing chemicals and the lawsuits that followed.
And although world demand for chemical products continues at a steady pace, ensuring Dow's marketability for some time to come, branching out into biofuels should bring additional revenues and a better image in communities.
Its efforts in that field haven't gone unnoticed, with Dow Jones ranking Dow Chemical on its Sustainability Index for the ninth time.
As for CTI, it wants to capitalize on Dow's heavyweight image, using the partnership to further its own sustainability goals.
Nevertheless, biofuel still struggles to find a market these days, but its appeal has already taken off in the airline industry...
A Little Help From the Feds
At least two companies - BioJet Corporation and E85 LLC - have finalized agreements to sell four million barrels of aviation bio jet fuel - a first step in promoting common usage. By the time they're done, they hope to provide 30 million barrels annually to airlines.
And in an effort to combat climate change, the European Union has inadvertently lent a helping hand to CTI, Dow and their competitors by mandating fuel requirements that will affect 4,000 aviators, including military bases.
In the U.S., Congress will likely pass similar legislation, although with the very vocal free market voices, it's bound to be less severe.
Between the two, CTI and Dow both stand to profit, as airlines scramble to meet the regulations by buying millions of barrels of more complimentary kinds of fuel.
Still, keep in mind that the biofuel industry will have certain obstacles over the next several years:
- It has yet to be tested on a large scale.
- Widespread distribution remains a problem.
- It faces industry reluctance, as oil companies try to stick with old methods for as long as possible (although Chevron Corporation (NYSE: CVX) and BP (NYSE: BP) both have biofuel divisions).
- Consumers will need time to transition from the old to the new.
- Too many cars and planes simply can't run on biofuel without large modification.
The Switch From Oil to Alternatives
Still, environmental responsibility continues to provoke debate, especially among younger generations. And even though "Big Oil" has a big grip on the energy sector, biofuel and other alternative energy resources will eventually make a bigger impact.
And I expect other companies - both old and new - to begin looking for innovative ways to fuel their business and meet consumer demand for greater stewardship.
Eventually they have to address the finite amount of fossil fuels, shortage of landfill space and the abundance of waste. And biofuel can positively impact all of those problems... not overnight, but over the long-term.
And when they do, Dow Chemicals and CTI will be there to help them out.