Carley’s Corner: Biodiesel Boom or Bust?

Carley’s Corner: Biodiesel Boom or Bust?

I grew up in the farm state of Iowa. Though I lived in the city, a short drive in any direction would put me in the midst of sprawling corn and soybean fields. At the time, nobody thought food crops might have potential for being an alternative fuel source. But when the Organization of Petroleum Exporting Countries (OPEC) hit us with the first oil embargo back in 1973, perceptions changed.

In 1980, I wrote a book titled How To Make Your Own Alcohol Fuels. At the time, everybody was gung ho over ethanol alcohol as a way to reduce our dependence on foreign oil. There was a lot of buzz about energy independence, and a lot of people (farmers mostly) were investing in small scale alcohol fuel production facilities. Some of these were not much more than backyard moonshine stills, but others were modern facilities capable of producing thousands of gallons of fuel per month. Then oil prices came back down and the alcohol fuel movement collapsed, except for a few politically connected big-time alcohol producers who got special tax breaks and incentives.

Fast forward to today. Oil prices are again being driven by politics in the Middle East. Ethanol alcohol is back again as both an octane booster and as an 85% ethanol/gasoline blend in “E85” for “flex fuel” vehicles. And now there’s a new kid on the energy block called “biodiesel” vying for acceptance as an alternative renewable fuel to diesel fuel made from crude oil.

Biodiesel is essentially diesel fuel made from non-petroleum sources. Most biodiesel is currently made from soybean oil, but it can also be made from sunflower seed oil, or less expensive animal fats such as beef tallow or chicken fat, or even recycled restaurant grease. Biodiesel can be blended with conventional diesel fuel much like ethanol is blended with gasoline. Most diesels can run mixtures of 10 to 15% with no modifications, and up to 100% straight biodiesel with minor modifications. Biodiesel tends to gel when temperatures drop below 40° F (depending on the base stock), so the blend typically has to be cut back for reliable cold-weather operation. Some municipal bus fleets run a 75% biodiesel mixture in the summer and switch to a 20% blend in the winter.

Nobody really questions the viability of biodiesel as an alternative fuel for diesel engines. But the economics are questionable.

According to industry sources, biodiesel currently costs about $1 a gallon more to produce than conventional diesel fuel when soybean oil is used as the primary ingredient. This makes the fuel about 10% more expensive than conventional diesel ($3.13 a gallon for biodiesel versus $2.70 a gallon for conventional diesel). A recent rise in soybean prices has created a financial pinch for many biodiesel producers, and a few have actually had to shut down their operations. So there is growing interest in using less expensive animal fats. Chicken fat, for example, sells for about 19 cents a pound versus 33 cents a pound for soybean oil.

Biodiesel relies heavily on federal tax breaks to make it economically viable. If the tax breaks continue, biodiesel probably has a strong future. The new Congress that just convened in January will debate a bill called the Biofuels Security Act. If passed, the law would require the nation to use up to 30 billion gallons of ethanol and biodiesel by 2020, and 60 billion gallons of alternative fuels by 2030. The National Petrochemical & Refiners Association (NPRA), which is the voice of Big Oil, opposes the legislation because they see alternative fuels as a threat to their record high profits.

Whether or not the Biofuels Security Act passes, biodiesel is proceeding full speed ahead. According to the National Biodiesel Board, biodiesel production went from 25 million gallons in 2004 to 75 million gallons in 2005. The final numbers for 2006 are not yet in as of this writing, but are estimated to be 150 to as much as 225 million gallons! By 2010, production may hit 1 billion gallons of biodiesel a year.

Frost & Sullivan recently issued a report that said the biodiesel market earned $217 million in 2005, and may earn as much as $4.9 billion by 2012 if federal tax incentives remain intact. It looks like the biodiesel boom is on — at least for now. Biodiesel plants are popping up across the country. Michigan’s first biodiesel plant just went online in December. Wisconsin has three new plants under construction with a combined capacity of 45 million gallons a year. Even Hawaii is getting in on the trend. The number of fuel stations that offer biodiesel is also growing.

South Carolina currently has the most with 64, followed by Missouri with 47, North Carolina with 43, Texas with 40, Tennessee and Pennsylvania with 34 each, and California with 31. The only states that do not yet have any biodiesel outlets are North and South Dakota. Will history repeat itself? Will oil prices tumble once again and strangle the alternative fuels industry once again? With all of the political unrest in the Middle East creating market volatility, it’s hard to say which way the price of crude oil will go. Some analysts say any serious disruptions may send crude prices soaring to over $100 a barrel once again. Nigeria, which supplies about 10% of our imports, appears to be the next hot spot for conflict.

China’s booming economy is demanding more and more oil imports, and expanding vehicle populations across Asia will need fuel from somewhere.

To me, ethanol and biodiesel make political sense if not economic sense even if alternative fuels cost more than conventional petroleum-based fuels. I’d rather see my energy dollars go into the pockets of American farmers and producers of renewable alternative fuels than Arab oil sheiks, oil company CEOs and foreign speculators.

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