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The Wheels Come Off the Biodiesel Wagon
The Energy Collective ^ | Jan 4, 2010 | Robert Rapier

Posted on 01/05/2010 5:07:04 AM PST by thackney

Domestic Biodiesel Production Plummets

One of my Top 10 Energy Stories of 2009 involved the actions taken by the EU against U.S. biodiesel producers. U.S. tax dollars had been generously subsidizing biodiesel that was being exported out of the U.S. European producers couldn't compete against the subsidized imports, so the EU effectively cut off the imports by imposing five-year tariffs on U.S. biodiesel.

This was a big blow to U.S. biodiesel producers, and was one of the factors leading to a disastrous 2009 for U.S. biodiesel production. How disastrous was 2009? Per the National Biodiesel Board (NBB), here are the statistics from the past 6 years of biodiesel production:

2004: 25 million gallons

2005: 75 million gallons

2006: 250 million gallons

2007: 450 million gallons

2008: 700 million gallons

2009: 300-350 million gallons (estimate)

The NBB also reports that domestic biodiesel capacity is now operating at only 15%. There have been a number of stories in the past few days covering these developments:

Bad start to 2010 after 'rough year' for entire biofuel industry

A federal tax credit that provided makers of biodiesel $1 for every gallon expired Friday. As a result, some U.S. producers say they will shut down without the government subsidy.

A one-year extension of the biodiesel tax credit was included in a bill that was approved by the U.S. House recently, but it never made it through the Senate.

Politics and Energy Policy

I have often complained about the chaos that political leaders cause with inconsistency on energy policy. I will get into the wisdom of this biodiesel tax credit in a moment, but government policy makers need to send clear, long-term signals so energy producers can plan. This has long been a problem for planning energy projects. Wind and solar developers have lived with this uncertainty for years. It seemed like at the end of every year, there was a tax credit that may or may not be extended. The uncertainty often froze project developers, and created unnecessary delays.

The same has long been true in the oil and gas industry. One of the reasons that it has been difficult to get a gas pipeline built in Alaska was government refusal to commit to long-term tax rates. Imagine that you are contemplating spending $26 billion on a gas pipeline, but the government can't tell you what your tax rate is going to be. If my state income tax doubles, I can move to another state. But it isn't like you can pick that pipeline up and move it, so it is important that you know that the government can't double the tax rate in the event of a budget shortfall.

A different kind of government interference - a tendency to attempt to pick technology winners - resulted in cancellation of what I believe was a promising 2nd generation renewable diesel process. I documented the saga in several posts, but the gist was that because an oil company was involved - my former employer ConocoPhillips - Congress voted to specifically deny the biodiesel tax credit for a process that was both more efficient and more cost-effective than conventional biodiesel production.

By killing the credit, COP was placed at a $42/bbl disadvantage relative to biodiesel producers who received the credit, and thus COP decided to cancel the project. I documented that sorry saga here. I also explained the differences between 'green diesel' and biodiesel here.

Where to Now?

So where to go from here? We now have a classic dilemma created by the government. Through government fiat, an industry was created. Investments were made and infrastructure was put in place. The problem is that the particular industry that sprang up really had little hope of ever really competing without the subsidy. The reasons are alluded to in the link above:

"By the time you buy the feedstock and the chemicals to produce the fuel, you have more money in it than you get for the fuel without the tax credit," Francis said. "We won't be producing any without the tax credit."

I have long believed that there is no future for 1st generation biodiesel. I wrote in an August 2007 essay: "I have said it before, and I reiterate: Biodiesel's days are numbered." Note that the year after I wrote that the U.S. biodiesel industry had their best year ever. But the handwriting was on the wall for very fundamental reasons, and the prediction I made in 2007 is playing out now.

There are multiple problems that will make it difficult for biodiesel to ever compete without subsidies. In a nutshell the key problem is that the feedstock costs are linked to fossil fuel prices. The feedstock is generally a vegetable oil and methanol - an alcohol typically produced from natural gas. A second big problem is that biodiesel is an inferior fuel to hydrocarbon diesel (especially in cold weather). Further, the by-product of the biodiesel process is glycerin, which has limited value (especially at the volumes produced when biodiesel production is ramped up).

But this story is worse than simply a fuel that can't compete. As evidenced by the opposition of the NBB to the extension of the tax credit for COP's 2nd generation process, 1st generation biodiesel isn't even a bridge to 2nd generation biodiesel. Not only is it chemically different, but 1st generation producers have pulled out the stops to protect themselves against 2nd generation competition. So now we have a 1st generation industry that was already in trouble even with the subsidies that it was receiving, and a 2nd generation industry that could have been much further along were it not for 1st generation interference (which was aided by Congress).

If instead of picking technology winners, Congress had simply raised fossil fuel taxes, we wouldn't be in this dilemma. With the high level of embedded fossil fuels, biodiesel would have been unable to compete and an industry with no future would not have been created by the government. Green diesel, on the other hand, would start to look a lot better because of the lower level of fossil fuel inputs (particularly for gasification), and we might find plants starting up to produce green diesel from both hydrocracking vegetable oils (the COP process I described) and gasification of biomass (e.g., the Choren process).

What I expect to happen is that Congress will eventually extend the credit, and it will be applied retroactively. But there are no guarantees, so producers are once again left with uncertainty. What should happen - in my opinion - is announcement of a phaseout schedule. I wouldn't simply eliminate the tax credit cold turkey. That would be a blow to producers who invested on good faith that government support would be continued. But they also need to receive a message that this tax credit will be phased out over the next 3-5 years. At that point, prospective investors will be fairly warned that projects whose economics hinge on continued government subsidies are to be avoided.

This, by the way, is the sort of metric I try to apply to projects. I am looking for projects that will soon be viable without government support and can operate with low/no fossil fuel inputs. The first item means that governments have much less ability to wreck my project by withholding support, and the latter means that the project should become more attractive in the higher oil price environment that I expect.

That doesn't mean that initial government support isn't often helpful, but unless the underlying economics are sound then government support is a crutch I will never be able to throw away. In my opinion this is the case for most U.S. biodiesel producers, which helps explain why industry capacity is presently at 15%.

Disclosures

I want to make two very clear disclosures. First is that as noted, I worked for ConocoPhillips, and I was very pleased at the efforts we were making to commercialize green diesel. The fact that the government caused the project to be aborted by favoring one technology over another was a bitter pill to swallow. Again, I favor projects that are viable without government subsidies, but in this particular case the competing projects did get the subsidies.

Second, as I announced previously I now work for the company that owns the majority of Choren. I came to work for this company because I believe gasification has a long-term future, and I had written favorable articles long before this job opportunity arose. I have, however, had some suggest potential bias toward green diesel because of my link to Choren. What I say to those who might feel that way is the bias toward green diesel was because of my assessment of the technology. That is what led to my link to Choren, not vice-versa.


TOPICS: Business/Economy
KEYWORDS: biodiesel; energy
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To: thackney

That would be one of a small handfull of new energy technologies which seem to offer brighter futures. The others would be that EESTOR super capacitor, the Angellabs engine, and that Bombardier/Evinrude E-Tec engine which is actually being used on boats now. Other than that, I might could get interested in diesels after five years had passed in which diesel fuel was cheaper than low-grade gasoline in America, but I would not knowingly purchase something which was going to make me feel like a sucker.


21 posted on 01/05/2010 7:17:24 AM PST by wendy1946
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To: thackney

The National Biodiesel Board is located here in Jefferson city Mo.. I personally know one of the engineers who work for them.


22 posted on 01/05/2010 7:25:08 AM PST by painter (No wonder democrats don't mind taxes.THEY DON'T PAY THEM !)
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To: thackney
Good article. The nut of the problem is that it takes more energy to produce biodiesel than biodiesel has in it. The only point to biodiesel was the government subsidy.

It's also worth noting that one of the reasons McCain lost Iowa was because he did not support biodiesel and ethanol. Obama did. The alternative fuel industry is one example of why I see our government eventually having to crash and burn. By using deficit spending and other techniques, government promises enough special set asides so that the majority of the people get more out of the system than they put in.

People do not vote for fairness or overall good governance. They vote for what brings money to them.

Having worked in government funded institutions for the last thirty years, I have been bitten many times because I tried to be fiscally responsible running my department. When the budget cuts come, they're across the board, with no consideration of fiscal responsibility. If you don't spend your entire budget allocation for the year you don't get a pat on the back. You get your budget reduced the next year.

I read a good article about the difference between an individual starting a business and government starting a new program. The individual gets the product and machinery he needs and uses sawhorses and plywood for a desk. He rents the cheapest place he can find that meets his needs and starts trying to generate a profit. A governmental entity builds an office building, carpets it, buys all new furniture, hires a company to keep fresh plants in the area, puts artwork on the walls, and then says, "okay, what are we supposed to do in here?"

23 posted on 01/05/2010 7:28:22 AM PST by Richard Kimball (We're all criminals. They just haven't figured out what some of us have done yet.)
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To: Ghost of Philip Marlowe

But the price of corn didn’t fall.....


24 posted on 01/05/2010 7:30:56 AM PST by Freddd (CNN is not credible.)
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To: thackney
You might want to take a look at this...

The Angellabs engine afaik could work with or without spark plugs. It is vastly more efficient than today's engines.

25 posted on 01/05/2010 8:04:52 AM PST by wendy1946
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To: thackney
Bankers get two ethanol plants in bankruptcy

subsidizing failure

26 posted on 01/06/2010 3:08:42 PM PST by neverdem (Xin loi minh oi)
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To: CPOSharky

That 2 cents per gallon discount reimburses you for the lost miles per gallon from every gallon! Stop complaining - the government is “helping” you....


27 posted on 01/06/2010 8:16:05 PM PST by MainFrame65 (The US Senate: World's greatest PREVARICATIVE body!.)
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To: Ghost of Philip Marlowe
Biodiesel is a part of my retirement plan, I think. I hope to purchase a vehicle like this with which to enjoy my retirement. Since it's a diesel I figure that I might cut my own fuel costs, help out local restaurants by going into a business to help them dispose of waste oil and by-products very cheaply and maybe even make a few bucks selling to friends or neighbors. I don't have all the details worked out yet, but something along those lines. We plan on building a home like this: Earth Sheltered to save on energy and maintenance. Our future was all worked out until OHHHH BABY took over, sent the economy into a real tailspin and threatened to destroy all our freedoms by fawning over terrorists. Then of course my wife got cancer and is now in chemotherapy. Life is what happens to you while you're planning your future, I guess. God sure does have a sense of Humor! All I can do is follow HIM and trust.
28 posted on 01/07/2010 6:06:16 AM PST by ExSoldier (Democracy is 2 wolves and a lamb voting on dinner. Liberty is a well armed lamb contesting the vote.)
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To: AdmSmith; Berosus; bigheadfred; Convert from ECUSA; dervish; Ernest_at_the_Beach; Fred Nerks; ...

29 posted on 01/07/2010 5:56:45 PM PST by SunkenCiv (Happy New Year! Freedom is Priceless.)
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To: thackney

“Splash and Dash” Biofuel Scam Costs Americans Millions, Lawmakers Say (June 2008)

http://www.freerepublic.com/focus/f-news/2031350/posts


30 posted on 01/08/2010 12:28:13 AM PST by AdmSmith
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To: ExSoldier

“...help out local restaurants by going into a business to help them dispose of waste oil and by-products very cheaply and maybe even make a few bucks selling to friends or neighbors.”

Be careful you don’t run afoul of the gov’t. In some states you have to jump through some regulatory/licensing hoops if you brew your own fuel.


31 posted on 01/08/2010 12:59:41 AM PST by PLMerite (Ride to the sound of the Guns - I'll probably need help.)
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To: PLMerite
Yeah, that's a concern. I'll do the research for certain to see if it's a viable plan. Thanks for the reminder. If we're very blessed, a good conservative President will be elected in 2012 and that person will FORCE "Big Oil" to drill here and drill now and refine here AND sell here at economic boom prices (say about $1.00 a gallon) guaranteed to jump start the economy like nitro injection.
32 posted on 01/08/2010 4:35:41 PM PST by ExSoldier (Democracy is 2 wolves and a lamb voting on dinner. Liberty is a well armed lamb contesting the vote.)
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