Biodiesel Expansion

With biodiesel expansion underway the biodiesel industry has exploded in recent years to include biodiesel construction, with at least sixty-five plants under construction at this moment in the United States alone.  Biodiesel demand has grown from seventy-five million gallons sold in 2005 to an estimated 200 million gallons sold in 2006. 

Significantly, the rapid growth of the biodiesel industry has lead to a need for new producers to gain a full understanding of the construction and transportation challenges facing the industry.  The first biodiesel plant was built in 1996.  Currently, there are three live plants, four in construction and four on the docket for this year.  It is predicted that by 2009 we will have plants in varying stage of development and more than 600 million gallons of production capacity per year.  Furthermore, transportation is an issue of concern for biodiesel producers, particularly as the cost of fuel remains high and railcars are difficult to come by.

Even as biodiesel appears to expand, many factors may disrupt the rapidly growing industry.  Consequently, farmers are directly impacted by this growing phenomenon.  Farmers believe that simple economics issues are inhibiting further construction of biodiesel plants.  For example, high soybean oil prices, in addition to projected petroleum prices that rang from fifty to sixty dollars a gallon has dampened the incite for biodiesel investment.  This is an indication, without alternative solutions, that it is unlikely that new biodiesel plants will be completed in 2008.  Additionally, more ethanol plants are contemplating extracting the corn oil from the ethanol process and using it to make biodiesel.  Meanwhile, seed companies are attempting to find methods of getting more oil from a soybean.  That would inevitably create more feedstock, reducing the cost.

Many speculate that there are some government policies that are hindering biodiesel production or development of its industry.  The first policy issue is the extending of the biodiesel blenders tax credit that is scheduled for expiration.  Basically, the tax credits provide innate comfort and project stability for investors and bankers who are looking to finance more biodiesel projects.  Another policy issue is the Federal Commodity Corporation BioEnergy program.  This program would offset costs of the feedstock to produce biodiesel.  There is also an increasing debate between biodiesel and renewable diesel.  Specifically, the “renewable diesel” definition was expanded by the IRS in the Energy Policy Act of 2006 to include biomass, vegetable oils and animal fats, in the oil companies in order to qualify for the biodiesel blender’s tax credit.

The renewable energy is dispersed for biodiesel, ethanol and electricity.  As the three components are interactive in some aspects, they may also be affected by any external condition at any given time.  Generally, the use of bioenergy feedstocks could not only assist in the reduction of the reliance of foreign oil, but also provide significant environmental benefits to invigorate rural economies.  More so, the actual expanding of ethanol levels and biodiesel production may impact the United States agriculture and the economy.  The impact of meeting production targets of 60 million gallons for ethanol and 1.6 billion gallons for biodiesel by 2030 are incorporated in the projections surrounding the concern and stability of agriculture and the economy.  It is predicted by 2030, agricultural exports are reduced by three billion, which is the most significant reduction occurring in the soybean market.  Ironically enough, during that same period of time, ethanol is projected to displace more than twenty percent of domestic gasoline consumption, potentially reducing oil imports by fifty- two billion dollars.  

The employment of two models is used to measure the effect of expanded ethanol and biodiesel production on agriculture and economics.  The POLYSYS model and the IMPLAN model are both implemented to detect such impact.  The POLYSIS model is unique in that it has the ability to provide annual estimates of changes in land use.  The results are generated from the demand of the bioenergy industries, including changes in the economic conditions that affect adjustment costs.  This approach accounts for adoption and the identification of short- term requirements that a market or policy incentive mechanism must meet for agriculture to remain a reliable source of feedstocks for bioenergy, without imposing an incline in costs for customers.  Subsequently, the POLYSYS model is linked with an input- output model entitled IMPLAN.  This model is designed to protect the economic impacts of ethanol and biodiesel feedstock production and conversion.

Recently, policy initiated the active increase in the development and use of bioenergy and bioproducts using starch, cellulose, oil, etc.  An Executive Order was actually signed by President Clinton to triple the use of bioproducts and bioenergy in the United States by 2010.  In addition, the National Energy supply Diversification and Disruption Prevention Act, passed 2005, encourages the evolution of more renewal energy.  While ethanol is the primary focus, biodiesel is also defined as an eligible renewal fuel.

The most common sources of oil for biodiesel production in the United States are soybean oil and yellow grease (primarily recycling cooling oil).  Despite the possible discrepancies that follow biodiesel expansion, the interest in the production of the renewable fuel has been fostered by mandates and financial incentives offered by the governments.  On the other hand, projected increases in vegetable oil prices, especially soy bean oil, will continue to pressure margins for biodiesel producers.