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Oil Is Cheap But This Company Is Buying 3 Million Gallons of Biofuel Anyway

By Travis Hoium - Aug 25, 2015 at 6:05PM

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Why is FedEx spending millions on fuel made from forrest scraps?

Going green in the airline industry may be more than just a PR strategy for airlines. They're trying to save green by buying biofuels ahead of potential international regulations on commercial aircraft that could still be years away.

FedEx (NYSE: FDX) was the latest to agree to buy biofuel, in the form of a 3 million gallon per year deal with Red Rocks Biofuel. The reasons behind the move says more about how businesses are looking at carbon emissions today than it does about a commitment to renewable fuels.  

FedEx has the largest airline fleet of the major delivery companies.

The reason behind a biofuel buy
What FedEx is worried about today is a United Nations agency called the International Civil Aviation Organization, which has been tasked with creating limitations  on carbon emissions for the commercial aviation industry. It is expected to come up with rules by February 2016 to curb carbon emissions and then the U.S. Environmental Protection Agency will create rules for the U.S.  

To get out in front of the rules airlines are starting to line up suppliers for biofuels. Southwest Airlines (NYSE: LUV) is also working with Red Rocks Biofuels and together with FedEx they'll buy 6 million gallons of renewable jet fuel from a brand new 15 million gallon per year refinery that's being built in Oregon. The facility will turn 140,000 tons of forest waste into fuel and could be the tip of the iceberg for the booming bio-based jet fuel business.

While this is a kick in the bucket compared to the 1.08 billion gallons of jet fuel FedEx burns each year and even less compared to the 1.8 billion gallons Southwest burns, it's a start.

What complicates matters today is the incredible drop in oil, falling below $40 per barrel recently. Biofuels haven't typically been able to compete with low oil prices on a cost basis so this may not be the start of a movement toward biofuels in general.

Low oil prices make biofuels complicated
When oil prices were over $100 per barrel there was even some economic justification for biofuels, but with oil now trading around $40 per barrel the economic argument is harder to make. FedEx and Southwest are keeping actual biofuel costs close to the vest but they said it would be competitive with traditional fuel.

Where oil trends could tell us if the move to even more biofuel could be coming in the future. The problem is that low oil prices make the economics of biofuel tough to justify.

Taking the risk out of flying
When you look at the FedEx and Southwest Airline deals to buy 3 million gallons of jet fuel from plants, it's a way for them to lower risks that future regulations could pose on their businesses. When combined with the improved efficiency from newer aircraft it could be a great way to de-risk the business long-term. Just don't think this is the beginning of a movement to biofuels for the airline industry as a whole. This is still a tiny percentage of their fuel needs and that'll be true for the foreseeable future.

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Southwest Airlines Co. Stock Quote
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