The biodiesel economic advantage is large

Could we see U.S. biodiesel production in excess of 1.8 billion gallons this year? One economic analysis suggests the scenario is plausible.
By Ron Kotrba | January 23, 2013

“The biodiesel advantage is large and a dramatic change from our analysis last week,” state Scott Irwin and Darrel Good of the University of Illinois, in a Jan. 16 farmdoc daily post about the blend economics of U.S. biodiesel versus Brazilian ethanol for obligated parties to meet their undifferentiated advanced biofuel volume obligation under the renewable fuel standard.

Before the biodiesel tax credit was renewed, Irwin and Good noted in a Dec. 7 post that blending biodiesel would be twice as expensive for obligated parties as imported Brazilian ethanol to meet their advanced biofuel quotas. Then, once the $1 per gallon biodiesel tax credit was reinstated, the two wrote in a Jan. 10 post that, despite the tax credit, obligated parties would still find it economically cheaper to blend Brazilian ethanol than U.S. biodiesel.

After receiving a number of comments from the public and private sector, however, Irwin and Good incorporated new elements into their analysis—the Ad Valorem tax on Brazilian ethanol of 2.5 percent; the blend wall scenario “opportunity cost” of lost profit in blending Brazilian versus lower-priced domestic ethanol; relative economics  of blending the two products varies on location within the U.S.; and ongoing fuel price fluctuations—and posted an update six days later that culminated in the statement I started this post with: the biodiesel advantage over Brazilian ethanol is large.

For years, ever since EISA passed in 2007, the biodiesel sector has looked at the advanced biofuel category as an opportunity to grow beyond the rather limited biomass-based diesel carve-out. Now, provided Good and Irwin’s analysis holds up, the now-1.28 billion gallon carve-out may truly be a floor (instead of the one-dimensional floor and ceiling combined) with the potential, if the entire advanced biofuel pool were met with biodiesel, to see production levels spike to 1.83 billion gallons.  

I wonder how many obligated party oil companies that are members of AFPM and API—the two oil lobbies that have hammered away at the biodiesel industry, claiming that greater biodiesel production will add up to $381 million to consumers’ transportation fuel bill in 2013 (notice that they don’t say what they really mean, which is, greater biodiesel production would eat into their profits, so the driving public will make up for it)—will opt to blend biodiesel over Brazilian ethanol to save money? Don’t hold your breath though, if you think they will pass those savings on. 


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