Tuesday, January 31, 2006

Looking Behind; Looking Ahead

Is it really the end of January already? Time in biodiesel land seems to by flying by. 2005 was a breakout year for biodiesel and 2006 is set to prove even more important as the industry manages it first real growth spurt.

In the tradition of year-end reviews, here is my list of 2005 biodiesel highlights.

2005 would not have been “2005” without the biodiesel blender credits, which were passed at the end of 2004 and became effective January 1, 2005. As regular readers of All Things Biodiesel will surely know, those credits provide a $1.00 per gallon Federal Excise Tax credit for virgin biodiesel and 50 cent per gallon credit for recycled biodiesel. These credits signaled to the biodiesel market that the price difference between petroleum diesel and biodiesel was about to shrink substantially and that the Federal government was firmly in biodiesel’s corner.

The second big trend of 2005, which was only possible because of the blender’s credit, was the entrance of Big-Ag into the biodiesel market. Cargill announced plans to build a 37 million gallon per year facility in Iowa and ADM announced plans to build 50 million gallon per year facility in North Dakota. With Big-Ag making a significant move into biodiesel, the landscape changed in a few key ways. First, biodiesel has begun its move from a niche fuel to a mainstream fuel additive. Second, the risk of Federal subsidies not being renewed has significantly diminished. Big-Ag has a lot of influence on the hill and will surely now use that influence to protect its investment in biodiesel.

For those of us who like the community aspects of biodiesel, the entrance of Big-Ag is a mixed bag. On the negative side, Big-Ag biodiesel makes community scale biodiesel more challenging. If and when we see a biodiesel supply glut, Big-Ag will flood the market with cheap biodiesel. It will want to maintain and/or expand its market share and will be able to operate with little to no margin because of its extensive non-biodiesel revenue sources. On the positive side, Big-Ag will undoubtedly bring more professionalism, stability and innovation to biodiesel, as the presence of Big-Ag attracts new entrants into the biodiesel marketplace.

The third big event/trend of 2005 was the price of petroleum. Sustained high petroleum prices had a number of beneficial effects. First, as the American consumer felt the bite of higher prices at the pump, alternative fuels like biodiesel, which hold the promise of lower prices over the long term, became the darling of the press. Second, as the price difference between biodiesel and petroleum diesel shrunk, more fleets felt comfortable about making the plunge into biodiesel. Similarly, that same shrinking price differential, when combined with government incentives, made biodiesel less expensive than petroleum diesel in certain markets, most notably Illinois, which became America’s “biodiesel sponge” in 2005.

Katrina proved to be another catalyzing event for biodiesel in 2005. Katrina reinforced the trends outlined above regarding high petroleum prices, as Katrina caused a significant petrol price spike. Katrina briefly caused biodiesel “price inversion” (B100 less expensive the diesel #2) in several markets, including the Pacific Northwest. Katrina also highlighted America’s dependence on petroleum and gave fuel diversification policies a much needed shot in the arm.

Along similar lines, the emergence of James Woolsey and other national security hawks onto the scene, provided Americans and their policy makers with another good reason to support biodiesel: reducing America’s dependence on foreign oil. While this benefit of biodiesel has been expounded upon for years by farmers and environmentalists, it took a conservative Republican like Mr. Woolsey to give the argument credibility with his follow conservatives and the press.

There are many other important events and trends that warrant mention: commercialization of algae to biodiesel by GreenFuel Technologies and Greenshift Corporation; the huge spike in biofuel and biodiesel conferences, a sure sign of froth in the market; seasonality in biodiesel demand, which seems to be the result of farmers using substantially less biodiesel in November as work in the fields comes to a close and less consumption in the upper mid-west and north-east as winter approaches; and the passage of the Energy Bill, which created a Federal renewable fuel standard.

So what does it all mean? Only time will tell, but here are my thoughts on some key trends to watch in 2006.

Palm biodiesel will be an increasingly big story in 2006. The economics of palm biodiesel compared with soy biodiesel have excited many and have compelled others into investigating its potential in the U.S. As one would expect, this has not won the favor of America’s soybean growers, who have to date, had close to a monopoly on U.S. biodiesel production. Rest assured that the American Soybean Association will do everything in its power to restrict palm biodiesel’s access to the biodiesel tax credits. But as the biodiesel industry develops on the coasts, those developers will be looking closely at palm as an abundant source of low-cost feedstock. The cold flow properties of palm biodiesel will need to be worked out, but many smart minds are currently working to solve that problem.

Many states are looking to follow Minnesota’s lead and enact B2 or other low blend requirements. Washington State is currently actively debating several such proposals working their way through Olympia. Many eyes are on Washington State and if they are successful, I would expect to see several more states follow their lead. On the other hand, if they are unsuccessful, opponents of low blend mandates will feel emboldened and will have the upper hand in fighting such proposals on other states. This battle will take place against the backdrop of Minnesota’s great difficulty in implementing its B2 mandate.

Tens of million of biodiesel production will be coming online for the first time in 2006. Many new biodiesel consumers are coming online as well. Will demand increase enough to match the increase in supply? I optimistically believe so, but I also believe we will see surplus in some markets. Given the cost of transporting biodiesel, I think the market will be increasingly regional compared with the past, when mid-western biodiesel producers shipped biodiesel to the rest of the country.

The implementation of ultra-low-sulfur diesel in 2006 has the potential to be the most important source of growth the biodiesel the industry has ever seen. On the other hand, it is far from certain that biodiesel will be chosen lubricity additive.

It will undoubtedly be an exciting year for biodiesel. I look forward to seeing many of you and next week’s NBB conference and continuing the biodiesel conversation.