by Connie Hardy, content specialist, AgMRC, Iowa State University, chardy@iastate.edu.
Revised December 2007.
Overview
The biodiesel industry is growing and changing at a rapid pace, which makes determinations of current and future capacity and future demand for the product virtually impossible. However, significant trends in fuel usage and price, as well as trends in supply and price of input materials allow for reliable estimates. New energy legislation passed in December 2007 will also encourage further investment in biofuels production and handling.
Biodiesel that is predominantly derived from soybean oil is not a unique concept; in fact, the first diesel engines by Rudolph Diesel in the 1890s were designed to run on refined vegetable oils. Inexpensive petroleum-based fuels prevented biodiesel fuels from receiving much consideration until fuel shortages occurred in the 1970s and again during the Gulf War in the 1990s. Both of these interruptions to cheap oil supplies sparked renewed interest and research in using domestically grown and renewable sources for fuel production. Biodiesel did not experience general acceptance in the United States until the late 1990s even though it has been used extensively in Europe for nearly a quarter century.
Demand
A DOE economic analysis indicated a potential demand for the oil equivalent of more than 300 million bushels of soybeans for domestic biodiesel production by the year 2016. However, production capacity in the United States has grown more rapidly than predicted. As of November 2007, plants in operation have a total production capacity of approximately 1.85 billion gallons of biodiesel.
With a current conversion ratio of 1.5 gallons of soydiesel per bushel of beans, or one gallon of soydiesel from seven and half pounds of soy oil, current production capacity could demand oil from more than 1.2 billion bushels of soybeans. However, new processing plants can make biodiesel from other fat sources as well, including other vegetable oils, animal fat from rendering plants and white grease from restaurants. Rapid growth in the biofuels industry has pushed the prices of all fats upwards. Crude, degummed soy oil has risen from 28 cents per pound in January 2007 to just under 50 cents per pound in late November 2007.
In a study titled, “Gasoline and Other Fuel Additives,” the Freedonia Group Inc., a Cleveland-based market research firm, forecasted that U.S. demand for biodiesel would increase 32 percent by 2008. The group said biodiesel’s demand would increase the fastest of all fuel additives, going from $60 million in sales in 2003 to $240 million in 2008. Environmentally driven legislation, such as the renewable fuels standard, was factored into the projection. New energy legislation passed on December 19, 2007 raises fuel efficiency standards for passenger vehicles and establishes a new renewable fuels production standard of 36 billion gallons per year by 2022.
Recent growth in biodiesel usage is in response to EPA regulations taking effect in 2006 that require significant reduction of the sulfur content in over-the-road diesel fuel. The Environmental Protection Act (EPACT) regulations also allow energy tax credits for fleet owners that utilize biodiesel in their vehicles. Passage of legislation for production and for consumer tax credits and the national renewable energy policy have also sparked additional usage of biodiesel. As a result of these current and pending regulations, usage by private industry and fleets have already resulted in a fairly quick acceptance of biodiesel blended fuels, usually at a two percent blend (B2).
Production
The production of biodiesel is a proven science and an efficient process. Simplified to its core steps, the process is accomplished by combining refined soy oil with an alcohol and a catalyst. When the catalyst is removed, the remaining components are biodiesel and a small amount of glycerin. Because of the simplicity of the production process, conversion of existing soy-processing plants and rapid construction of new facilities will likely be able to keep up with new demand.
The final product can be burned as 100 percent pure biodiesel (B100), but because of cost differences, it is generally marketed as either a B2 blend or a B20 blend. It is also marketed as a fuel additive for traditional diesel fuel because of its lubricity properties. Lubricity benefits and emission reduction are significant at levels as low as 2 percent blends (B2).
Competitive Advantages
Biodiesel can be made from any organic oil source, plant or animal. Soybean oil is currently the most efficient feedstock and provides the best quality end product. A soy oil based diesel fuel tends to have more efficient conversion rates and better flowability in cold temperatures compared to other oils and fats. Soybean oil is not the cheapest feedstock source so the benefits that soy oil has must compete against the less expensive plant oils, and even cheaper animal fats and waste oils. Price constraints for all vegetable oils will continue to grow as rapid growth in biodiesel processing plants puts additional pressure on the available vegetable oil supplies. As the industry matures, additional marginal efficiencies will likely be found in production processes; however, it already has a 3.8:1 efficiency ratio of energy produced compared to energy consumed to make it.
Extensive research is being done to identify technologies to utilize animal fats, other oilseed crops and waste oil products such as spent fryer grease as alternative feedstocks for renewable fuel production. Price of the base feedstock will ultimately determine the preferred oil source, assuming it can meet all regulatory standards and performance expectations. Frequent world gluts of oils from alternative sources such as palm oil will constantly pressure soy to remain the oil of choice.
Competitive Intensity
The National Biodiesel Board currently identifies 165 active production facilities compared with 45 facilities in 2005.
In addition, 80 new biodiesel plants are under construction and four existing facilities are under expansion. These plants range in capacity from 50 thousand gallons per year to 100 million gallons per year.
Governments/Regulatory Involvement
EPACT regulations opened the door for introduction of biodiesel to fleet managers by providing environmental tax credits for the use of the renewable fuel. By 2006 more than 600 fleets used biodiesel blended fuels. Fleets using biodiesel include military installations, national parks, and municipal utility companies; even the entertainment sector has embraced the renewable product. The National Biodiesel Board reports that thousands of government fleets, businesses, truckers and other consumers are now using biodiesel.
Supply Chain Elements
Three hurdles being aggressively addressed by the biodiesel industry are consumer awareness, infrastructure development and balancing demand/capacity growth. The fuel has minimal special handling requirements, but introduction and acceptance into the traditional fuel distribution system will take time. Farmer organizations are actively engaged with distributors in developing consumer awareness and are responsible for the introduction of many state and national legislative support measures. Finally, striking a balance between growing market share and building capacity will be critical to the success of the industry as a whole, with particular attention being given to having available and affordable feedstock to serve the growing production demand.
Profile created May 2004 and revised December 2007.