Biodiesel rack prices temporarily dip below petroleum

By | November 10, 2006
When the federal biodiesel excise tax credit is applied, biodiesel spot prices are usually lower than diesel, but in August, adjusted rack prices followed suit-this was an anomaly. "Even when biodiesel was selling at its peak and diesel crashed, [biodiesel] got a little lower than diesel," said Greg Kary of Western Petroleum. "Not for a very long period of time though."

August was the only time when the price of biodiesel has been lower than diesel. "When diesel spikes really high, biodiesel doesn't catch up as fast," Kary explained.

At press time, diesel prices were between $1.80 and $1.87, and biodiesel was selling at $2.65, but the renewable fuel becomes cheaper with the blender's credit. "The racks on OPIS don't show that because they don't have trucking and throughput, and the sellers try to keep it as close to diesel as they can," Kary said. "What happens is, if biodiesel is $2.65 and diesel fuel is $1.75, [companies like Western Petroleum] are not going to encourage the sale of biodiesel because you have [to add] 15 cents freight and 15 cents throughput for every gallon. Actually your costs are over diesel fuel, so you have less incentive to sell biodiesel. The price gets a little bit higher."

The price of biodiesel rises significantly in what is often a short trip between production plants and distribution terminals. "Keep in mind there is value added between the rack and the plant," Kary said. "If you're a consumer, you can't go to a plant. It just wouldn't work. You have to have handling, and you have to have blending."

However, when biodiesel prices dropped below diesel, companies like Western Petroleum started favoring biodiesel. "In August, it went crazy because [biodiesel] was $3.30 at the plant, and it was $2.70 at the rack," Kary said. "Therefore, even after your costs, it was way less. So people like us encouraged B20 blends like crazy that made it cheaper."

On Oct. 5, according to OPIS, the price of biodiesel blends ranged from $1.87 for B2 through $3.09 for B100 in Alexandria, Minn. Alexandria, Minn., is a good location point to observe the market because it is probably where most of the biodiesel is sold, Kary said. "Now what you're seeing there is that diesel is obviously lower than biodiesel because the stronger the blend, the higher the price," he said. "In August, that would have been the reverse. We would have been encouraging biodiesel."
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