Market Penetration of Biodiesel

1. Market Penetration of Biodiesel Kenneth R. Szulczyk, Ph.D.

2. Why Biodiesel? • U.S. petroleum reserves are declining • U.S. petroleum imports are increasing • Biodiesel substitutes for diesel fuel • Biodiesel could slow down petroleum consumption

3. Why Biodiesel? • U.S. Petroleum Production • 1,000s of barrels • Peaked in 1970s

4. Why Biodiesel? • U.S. Petroleum Imports • 1,000s of barrels • 1960 to 2005 • OPEC • Non-OPEC sources

5. Why Biodiesel? • Combustion of fossil fuels is a large source of carbon dioxide emissions • Global Warming • Greenhouse Effect • Belief that greenhouse gases like carbon dioxide are accumulating in atmosphere, causing the earth to become warmer

6. Biodiesel Recycles Carbon Dioxide

7. Why Biodiesel? • Biodiesel recycles carbon dioxide from atmosphere • Biodiesel has cleaner emissions than diesel fuel • Lowers tail-pipe emissions • Hydrocarbon (HC) • Carbon monoxide (CO) • Particulate matter (PM)

8. Biodiesel Problems • Biodiesel increases NOX emissions • Nitrous oxide • Biodiesel contains 93.4% energy by volume • Biodiesel made from • Saturated oil freezes around 100 C • Unsaturated oil freezes around -40 C • Presents a problem for winter use

9. Paper’s Purpose • Could biodiesel feasibly replace fossil fuel? • Predict market penetration of biodiesel into the U.S. diesel fuel market

10. Paper’s Purpose • Needed to do the following: • Calculate chemical conversion of vegetable oils into biodiesel • Determine impact of technological improvement • Calculate economic costs from literature • Account for market interactions • Biodiesel competes with other markets for feedstocks

11. Agricultural Markets • Biodiesel sources for United States • 1995 – 2000 Average • Soybean oil • 3.336 billion kilograms • Largest oil source • Corn oil • 1.2 billion kilograms • Second largest oil source

12. Agricultural Markets • Biodiesel sources for United States • 1995 – 2000 Average • Animal fats • Edible tallow • 739 million kilograms • Inedible tallow • 1.754 billion kilograms • Yellow grease • Used cooking oil from restaurants • 1.197 billion kilograms • Cheap source of oil

13. Agricultural Markets • Biodiesel diverts feedstocks away from • U.S. animal feed markets • Cattle, hogs, horses, mules, poultry, and sheep • U.S. export markets • U.S. human food • Production budgets are described in detail • Agricultural model

14. Soybean Markets • Soybeans • Animal feed markets • Export markets • Crushing facilities • Crushing facility • Soybean oil • Food and biodiesel industries • Export markets • Soybean meal • Animal feed industries • Export markets

15. Soybean Markets

16. Corn Markets • Corn • Export markets • Animal feed markets • Ethanol industry • Substitute for gasoline • Corn wet mill • Produces a variety of products

17. Corn Markets • Corn wet mill • Corn oil • Food and biodiesel industries • Gluten feed and gluten meal • Animal feed markets • Corn Starch • Corn starch can be produced into many products

18. Corn Markets • Corn Wet Mill • Corn Starch can be made into: • Ethanol • High fructose corn syrup • Artificial sugar used in food • Baked goods, Beverages, Canned goods, and Confections • Dextrose • Corn syrup

19. Corn Markets

20. Tallow Markets • Tallow • Byproduct of cattle industry • Domestic and biodiesel markets • No international markets • 100 kilograms of meat (beef) yields 16.35 kilograms of tallow

21. Yellow Grease Markets • Yellow grease • Waste cooking oil from restaurants • Domestic and biodiesel markets • No international markets • Assumed each pound of soybean or corn oil returns 0.1268 pounds of yellow grease

22. FASOM-GHG • Forest and Agricultural Sector Optimization Model-Greenhouse Gas (FASOM-GHG) • Large quadratic programming model • Written in General Algebraic Modeling System (GAMS) • Account for market interactions • Predict biodiesel market penetration

23. FASOM-GHG • United States decomposed into • 63 agricultural production regions • 11 regions for primary and secondary products • Contains import and export markets for many products

24. FASOM-GHG • 56 primary products markets • Agricultural and animal industries • 39 secondary products markets • Producers process primary products into finished products

25. FASOM-GHG • Biodiesel has two cost types 1. Endogenous Costs - determined in FASOM-GHG • Feedstock costs – producers purchase feedstocks to convert to biodiesel • Hauling costs – harvesting and hauling feedstocks to processing facilities • Update for crop yield improvements • Different regions have different crop yields

26. FASOM-GHG 2. Exogenous Costs - fixed and do not change • Production costs – cost to chemically convert oil into biodiesel • Yellow grease is $1.159 per gallon • Other sources are $0.76 per gallon • Capital costs – cost of buildings, equipment, chemical tanks, et cetera. • 10 year life for capital; 8% interest rate • All sources are $0.0628 per gallon • Transportation costs – cost of transporting biodiesel to retail markets (includes storage) • All sources are $0.05 per gallon

27. FASOM-GHG • Chemical yields • One gallon of oil (or tallow) yields 1 gallon of biodiesel • Conversion efficiency is 98% of theoretical • Derived from chemical reaction • No technological improvement for biodiesel • Chemical conversion is quite efficient

28. FASOM-GHG • Biodiesel produces glycerol as a byproduct • Chemical companies use glycerol to make soap, dynamite, foods, cosmetics, and pharmaceutical products • Glycerol is not included in FASOM-GHG • A large biodiesel industry would saturate the glycerol market • Glycerol price would drop significantly

29. Predicted Market Penetration • Diesel fuel price is proportional to gasoline fuel price Pdiesel = 0.8643 Pgasoline • Gasoline price ranges $1 to $3 per gallon • No international markets for biodiesel

30. Predicted Market Penetration • U.S. federal subsidies • Yellow grease is $0.50 per gallon • Other sources are $1.00 per gallon • Time period • Ranges from 2000 to 2020 • 2020 is not shown, because it contains terminal conditions

31. Predicted Market Penetration(millions biodiesel gallons)

32. Predicted Market Penetration

33. Predicted Market Penetration • Time paths have a “dip” • Source is from soybean and cattle markets. • Between 2005 and 2015 • Producers crush and export fewer soybeans • Soybean and cattle production are increasing over time. • An expanding cattle industry requires more feeds, e.g. soybeans • Soybeans are diverted from biodiesel industry

34. Predicted Market Penetration • Setting Gasoline price to $3 per gallon • View sources of biodiesel

35. Predicted Market Penetration(millions of gallons)

36. Predicted Market Penetration

37. Note • FASOM-GHG • Contains ethanol production • Substitutes for gasoline • Contains 3 technologies • Dry grind • Corn wet mill • Lignocellulostic – crop residues • Contains biomass production • Burns crop and wood residues for electricity • Co-fire with coal in different percentages

38. Conclusion • In 2004 • U.S. produced 58.6 billion gallons of diesel fuel • U.S. refineries operate at 93% of capacity • Biodiesel obtains a 3.1% market share in 2015 with gasoline price of $3 per gallon

39. Conclusion • Biodiesel is not likely to reduce reliance on petroleum • For more information, refer to: • Szulczyk, Kenneth Ray. May 2007. Market Penetration of Biodiesel and Ethanol. College Station, TX: Dissertation submitted to Texas A&M University.