Fuel pricing updated – and explained

With the price of diesel nearing $4, it’s a good time to reflect on the relative value of biodiesel and used cooking oil, and ultimately answer a difficult question: Why does the cost of biodiesel seem to creep up with diesel?

This is the first in what may become a series of topics – future articles may explain the value of a distributor in the fuel supply chain (why it’s not always a good idea to cut out the middle man); the effects of government intervention (subsidies, tax relief, and environmental legislation) on the biodiesel industry; sustainability in biodiesel production; and any other topics suggested by readers.

First, let’s talk about the biodiesel supply chain, in a somewhat simplified model. Crops are grown and harvested, seeds are crushed to extract oil, and the oil is made available for sale. From that point, the basics of biodiesel production:

1. Biodiesel producer invests in plant (typically millions, although possibly less for a very small plant)

2. Producer sources “feedstock” (oil), and other raw materials (methanol and catalyst)

3. Producer converts the raw materials into biodiesel and finds a buyer (usually a distributor)

4. Distributor takes the biodiesel in bulk, blends if appropriate, and finds a buyer (fleet customers, retail outlets, etc)

5. Customer fills up with biodiesel, breathes easier

Most people do not understand the complexities of the supply chain, and think it’s as simple as “marking up” a product in order to make a profit. Unfortunately, there are a number of factors that make it more complex than this. I can’t emphasize enough – the biggest factor in biodiesel production is the price of the feedstock oil. Soybean oil is currently over $4 per gallon – just for the oil! Subtract the $1 per gallon federal subsidy, then tack on production costs, and it’s easy to see why B100 at the pump is over $3.50 per gallon. Even the cost of used cooking oil is over $2.50 per gallon.

Aside from the feedstock, 20% of the biodiesel reaction is methanol – a toxic chemical that has fluctuated wildly in price. In the past two years, it’s gone from $2 a gallon, up to $5, and most points in between more than once. Interestingly, methanol use could be cut in half with the right production system, but that costs several hundred thousand or more – a cost only worthwhile if methanol goes above a certain threshold, which we are at today.

Several years ago, when oil and methanol were about $2 per gallon, biodiesel investors flooded the market with money for new plants. My phone rang daily with someone offering the promise of B100 at a competitive price, just as soon as the plant was finished. Fast forward to 2008, and more than half of all plants in the country are shut down or operating at massively reduced capacity. What happened? The feedstock providers looked at the downstream value of their products, saw massive growth in the biodiesel industry, and raised their prices to take a chunk. While biodiesel investors planned on major market growth, they didn’t seem to plan for their margins to be eroded out from under them.

This leads me to my next point – vegetable oil as a fuel. With the market price of used oil as a feedstock starting to approach $3, we can’t afford to sell it for less than its market value. Based on our calculations, we could turn every bit of oil we have into biodiesel, at a market price of $2.60 per gallon. Therefore, it will be our policy going forward to sell our WVO at this market price. It is assumed that the price of WVO will generally stay about $1 lower than B100, which will roughly track the price of diesel. This was a hard decision that we came to only after much discussion, and the realization that we are not in business to subsidize the public’s fuel cost.

So, here we are – selling B100 for $3.50 per gallon, AFTER the 50 cent subsidy. Our meager profit unchanged; meanwhile, the price of feedstock and other materials continues to climb. While writing this post, I was IM’ed by a broker offering me B99 from soy for $4.26. I hope our customers ride this out with us – without our loyal following of fanatical fuelers, we have nothing. I would not be surprised if our costs (and therefore, price) jump 40-50 cents in the next 90 days.

Final thought – biodiesel IS a replacement for diesel fuel. Therefore, it has roughly the same market value as diesel. Let’s forever dispel the notion that it should be cheaper than diesel. In fact, it’s a premium product, renewable, made in the US, better for the environment, better for your engine, and better for the world. Just like organic food costs more than mass produced, factory farmed food; biodiesel will generally cost more to make than petroleum diesel. If you’re an organic food shopper, biodiesel should be on your shopping list.Jason

One thought on “Fuel pricing updated – and explained

  1. Great point about the value of bio-diesel! Just because the we are making a renewable product out of free or cheap VO or feedstock does not mean the means to make it is cheap. -G

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