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Getting Down to Earth Amidst Soaring Oil Prices

It’s been a busy week for us in the news industry. Japan’s prime minister resigned and was promptly hospitalized; several big earthquakes hit Indonesia; Hurricane Humberto came out of nowhere, hitting the Texas-Louisiana coast with 85-mph winds; and the news highlighter for my little Commodity Store this week – crude oil prices hitting a record peak, crossing the $80 threshold to settle at $80.20 a barrel in New York on Thursday.

Oil eased on Friday though prices held near the previous session’s record high on supply worries ahead of peak winter demand. Oil prices have quadrupled since 2002 and are up over 30% this year alone. With emerging markets clamoring for energy and the traditional markets like the U.S. heading into the winter fuel-consumption season, analysts have told CNBC that the demand for oil could push prices up towards the $90 a barrel level.

Ouch! Just typing out these numbers makes me wince. And I’m sure I’m not the only consumer to feel the pinch. Which brings me to the subject of my column this week, Jatropha.

“Jatropha?” you say. “What’s that?” A couple of months back, I wrote a column about biodiesel where I mentioned a little-known inedible plant called jatropha curcas. Jatropha is fast-becoming the poster-child for the environmentally friendly biodiesel revolution and it’s been making headlines again.

Green Gold

Jatropha’s many enthusiasts argue that it stands head and shoulders above other crops cultivated to produce biodiesel for a number of reasons. Its main advantage is that it’s not a food crop. This is good news for supplies of wheat, corn and other crops that serve a dual purpose as an ingredient for biofuel and as food.

In the rush to cash in on the biofuels craze, farmers set aside more land for corn destined for the fuel tanks of environmentally-friendly cars as opposed to the dinner table. This has caused food shortages and higher prices of basic staples such as bread. Naturally, this has led to social unrest, most strikingly in Mexico when crowds took to the streets to protest rising tortilla prices.

Jatropha is also a low-maintenance crop that’s hardy and capable of growing in even arid soil. That makes it the ideal choice for developing countries. "Jatropha is low input," Steve Douty, executive director of Dl Oils, was recently quoted as saying. "It survives where others don't. It also grows best 25 degrees south or north of the equator. A big chunk of Africa is in that band."

The plant has a rich history. It was introduced to Africa and Asia by Portuguese traders and used as a hedge to protect crops and the sap has long been used in Latin American medicines for its antibacterial qualities. The seed is used for fertilizer in Africa because it is rich in soil nutrients, and the oil is used for French soaps.

Its main attraction now of course is that its seeds can be crushed and processed, not only into oil, which can be used in a standard diesel engine, but the residue too can be processed into biomass to power electricity plants.

The bottom-line here, as The Wall Street Journal pointed out recently, is Jatropha may be a more economic biofuel than corn-based ethanol.

Citing research from Goldman Sachs, jatropha could be used to produce a barrel of fuel for around $43, less than the cost of sugar cane-based ethanol ($45 per barrel) or corn-based ethanol ($83 per barrel) currently favored in the United States.

This has caught the attention of oil giant BP. The company signed a $160 million deal with British biodiesel producer Dl Oils, creating a joint venture that aims to become the world's top producer of jatropha oil by 2011. Wall Street is also singing the tough plant’s praises. Goldman Sachs has touted jatropha as one of the top candidates for future biodiesel production.

Soil vs. Oil

Green energy is becoming more sought after as traditional fuels surge in price, making alternatives more economically viable. The European Union has set a binding target for biofuels to make up 10% of vehicle fuels by 2020. President George W. Bush has called for Americans to cut gasoline use by 20% by 2017. Invariably, this trend will erode the dominance of traditional hydrocarbons.

That’s a fact not lost on the Organization of Petroleum Exporting Countries, which warned recently that alternative fuels pose a risk to future oil demand. OPEC is forecasting a brief drop in demand for oil by 2010 as alternatives such as biofuels play a bigger part in the energy mix, Reuters reported this month.

“We do see two issues as far as biofuels are concerned,” Mohamed Hamel, head of the energy studies department at OPEC's Vienna headquarters was quoted as saying. “The first one is the sustainability issue. The second issue is the impact on gasoline. These policies and objectives are creating an uncertainty ... as far as the demand for gasoline is concerned, in the next decade."

To be sure, it would be a mistake to say jatropha is the answer to the world’s biofuel question. As Patrick Barta writes in The Journal, output can be erratic and sometimes on the low side. “Even some of jatropha's biggest advocates concede the plant's oil output is unpredictable and often lower than expected. Although it can grow without water, it tends to do much better when water is added, raising its cost of production and mitigating some of the perceived benefits.”

Experts, including M. R. Chandran, adviser to the Roundtable on Sustainable Palm Oil, have also said the jatropha jury is still out. It would take five years of intensive research before jatropha could achieve productivity that would make its cultivation economically viable.

But with oil prices going up up up, it would seem that investing in this innocuous little plant is a very good idea.

Send Sri your questions and comments at commoditystore@cnbc.com.