Biodiesel: is it worth considering
...lter Specialty, Inc. Autryville, North Carolina Griffin Industries Cold Spring, Kentucky Imperial Western Products, Inc. Indio, California Interwest, L.C. Ralston, Iowa Oceanair Environmental Fuels Lakeland, Florida Pacific NW Biodiesel LLC Aloha, Oregon Peter Cremer North America LP Cincinnati, Ohio Southern States Power Company, Inc. Ontario, California Stephan Company Northfield, Illinois Sustainable Systems LLC Missoula, Montana World Energy Alternatives, LLC Chelsea, Massachusetts Source: FY 2002 Bioenergy Program Participants (Refer to figure 1) Figure 1 shows how biodiesel production has greatly expanded since 1999 when only one Million gallons of biodiesel was produced. In 2002, 25 million gallons is projected as the production figure. Percentage wise, biodiesel is the fastest growing fuel (Coltrain). The main drivers of biodiesel production are, low feedstock prices, environmental concerns, and national security issues. These main powerhouses indicate that biodiesel has a very good chance to mirror what ethanol production has done in this country in the past 20 years (increased due to popular demand). The American country is said to be following in the footsteps of the rest of the world. Nearly 40 percent of the cars in Europe have diesel engines (some cars are even fueled by B100, pure biodiesel) (Coltrain). Germany uses the most biodiesel, 200 million gallons in 1991, 500 million gallons in 2001 and an estimated 750 million gallons in 2002. Most of Germany’s biodiesel is made from rapeseed oil. The major economic factor to consider for input costs of biodiesel production is the feedstock, which is about 80 percent of the total operating cost. It takes around 7.5 pounds of fat or oil to produce a gallon of biodiesel(). If a feedstock is 20 cents per pound, the feedstock cost alone is nearly $1.50 per gallon The continual issue of lack of willing factories to start producing Biodiesel, is the only factor in holding back production of Biodiesel. Even though Biodiesel can be processed from any type of animal fats and plant oils, most factories see it as a risk to spend money and time converting into biodiesel producing factories. (Refer to figure 2) The total oil and fat production is currently 3.8 billion gallons per year. This production amount implies that if all the yearly production is used to produce biodiesel, the U.S. currently has a maximum production near 3.5 billion gallons when factoring in the conversion aspect. To put this amount in perspective, American consumers purchased about 57 billion gallons of fossil fuel in 2000. Diesel fuel use in 2000 was nearly 40 billion of that 57 billion gallons (Coltrain). A more complete list of potential domestic resources for biodiesel include (1) food grade, cooking oils (soy, canola, palm, peanut and sunflower), animal fats (lard, tallow, chicken fat, and fish oils) (Stroburg). Yearly, United States livestock slaughter facilities produce about 2.5 million tons of tallow (fat under organs) from cattle and about 0.5 million tons of lard from hogs (Jome). These figures could be processed into approximately 800 million gallons of biodiesel for one year alone. (Refer to figure 3) From 1978-1995, the average soybean oil price was 23 cents per pound. The recent soy oil market has been closer to 15 cents per pound. Even at 15 cents per pound, soy oil is more expensive than other feedstocks, especially waste grease, which normally costs around 5 cents per pound (Coltrain). A person who is looking for cooking grease and vegetable oil could find it recycled from any type of restaurant. However, high concentrations of yellow grease (a key ingredient of biodiesel) can be found in high population areas. Also, these high population areas are good locations for increased demand for biodiesel because of environmentalists addressing environmental concerns associated with fossil fuel burning. Therefore, yellow grease will likely be an important biodiesel feedstock since it is relatively low cost and abundant in expected high demand areas. While feedstock cost is the major component in producing biodiesel, other operating costs are also significant. One study estimated that the feedstock costs are about 58 cents per gallon and that the by-product glycerol, is credited at 39 cents per gallon, the total cost for processing biodiesel is 52 cents per gallon (Hansen). The total operating cost for converting fats and oils to biodiesel ranges from $1.39 to $2.52 per gallon, depending on which feedstocks are used (Hansen). Transportation of the biodiesel to gas stations throughout the country is another factor to be taken into consideration if major producers of biodiesel want more sales. “Local biodiesel markets could use trucks and have transportation costs of about two cents per gallon,” states Emerald Jefferson, spokesperson for biodiesel.org. He continues, “marketing regionally typically has transportation costs of about seven cents per gallon. If biodiesel is shipped to either the East or West coasts, the transportation costs would be about 17 cents per gallon.” (Refer to figure 4) The overall price for biodiesel can be affected on transportation costs, as well as cost increase/decrease in animal fats. Without any type of federal funding, biodiesel would be relatively higher priced than diesel. Now if diesel fuel prices increase and low cost animal fats and plant oils are used, biodiesel could become a price substitute for diesel (Smith). Figure 4 shows that diesel prices are generally increasing. In fact, diesel was over $1.00 per gallon for much of 2000. At this price and with a proposed government subsidy, biodiesel could become quite competitive with diesel. The production cost for biodiesel is determined by which feedstock is used. This price typically ranges from $1.40 to $2.40 per gallon. Biodiesel normally is priced at about $1.00-$1.50 per gallon higher than diesel. Roughly, for every percent of biodiesel in the mixture, the additional cost for the fuel mixture is higher by one or two cents. A blend of B5 costs about 5-10 cents more per gallon than straight diesel. Biodiesel users are willing to pay this additional price because they like the effects biodiesel has on their cars. Along with the prices of biodiesel, there is a study competition on how to keep biodiesel cheaper, thus making it more attractive. Biodiesel production will compete with established markets for fats and oils. Vegetable oils and animal fats are currently used for food products, animal feeds and industrial products. Figure 4 shows that food products account for 72 percent of the fats and oils currently used. About 97 percent of U.S. soybean oil is used for edible purposes. Generally, the markets for fats and oils used in food products will be higher priced than what the market can bear for fats and oils used to produce fuels. Other important economic factors that could alter the biofuels industry are that of the 2002 Energy Bill. The American Soybean Association (ASA) Biodiesel Campaign took a major step forward this past July 31, 2003 when the U.S. Senate approved an Energy Bill that contained a number of incentives designed to encourage the use of biodiesel, including the ASA-backed biodiesel tax incentive, states a National Public Radio talk show host. After weeks of heated debate, the Senate voted 84 to 14 in favor of the 2002 version of the Energy Bill that provided a 1-cent reduction of the diesel excise tax per percentage of biodiesel blended with diesel up to 20 percent. The bill also includes a Renewable Fuels Standard that calls for the nation's fuel supply to increase its use of renewable domestic fuels, like ethanol and biodiesel, to 5 billion gallons in 2012 (Heck). Government funding from the federal government and individual state governments are a major driving force in biofuel production. The ethanol and biodiesel industries have survived in the past because of these government subsidies. The biodiesel industry is positioned to have a similar impact if the renewable fuels standard is passed and a biodiesel partial tax exemption becomes law. The proposed tax exemption will be different than the ethanol excise tax exemption (Heck). “For each percent of biodiesel used in a blend with diesel the fuel tax rate will be reduced by an equal amount of cents, up to a maximum of 20 cents. For example, a 5 percent blend of biodiesel will equal 5 cents reduction in the fuel tax. This figure is significant because then the market price of biodiesel would be similar to diesel’s market price,” exclaims Jefferson. A recent incentive passed by the USDA has been a $300 million biofuels effort to increase ethanol production and other renewable biofuels such as biodiesel. This incentive provides payment to renewable fuel plants that increase the amount of fuel produced from the preceding year. This program started in 2001 and was extended in the 2002 Farm Bill through 2008 (Coltrain). This payment goes directly to renewable fuel plants that increase production. A conversion factor for each feedstock determines the payment amount. The maximum payment is capped at $7.5 million each year. Some new ethanol plants could receive this maximum amount, as well as expand production. State subsidies are another important part of ethanol production. Many states encourage production with different incentives for ethanol plants. For example, Minnesota has a state incentive program of 20 cents per gallon of ethanol produced and requires all gasoline to contain an oxygenate such as ethanol (Jome). This program allows Minnesota to use almost 300 million gallons of ethanol per year. In comparison, Kansas uses about 5 million gallons. These incentives usually are distributed directly to ethanol plants that meet the various requirements instead of increasing the market price of ethanol like the federal excise exemption (Jome). These state subsidies vary greatly across the country and are always subject to chang...