The Price of Fuel

The price of biodiesel just went up. Just as everyone is clamoring for cheap fuel. Our phones are ringing off the hook, not out of interest in renewables, but from pressure from petroleum pricing.

The price of biodiesel is painfully easy to explain, once plugged into the classical laws of supply and demand, but for some reason, those laws shouldn’t apply to the average American’s fuel costs.

The other day at lunch I was telling Evan that I thought we should double our price, from 3.50 to 7.00 a gallon. He was mortified. He felt it was “counter-intuitive.” But my logic was that if we can’t supply anyone with fuel for 3.50 a gallon, why not double it and not supply anyone for 7.00?

When President Bush signed the Jobs Creation Act last fall, our phone started ringing from people saying “Now that there are tax credits in place, when is your price going to drop?”

At the time, it was an easy answer: “Nothing kicks in until January—I doubt you will see price reductions until then.”

In January our phones were ringing with “Now that you can get 1.00 per gallon off, when are we going to see that at the pump?”

That answer was trickier, as we explained the IRS had not yet interpreted the new law, and that no one was going to cut price until they saw revised forms and rulings on how the tax credit would impact their operations. We told them that they might see some price reductions in the spring.

Now that the forsythia are fading and the dogwoods are starting their show, our phones ring off the hook with “The price of petroleum is outrageous, when are we going to see cheaper biodiesel?”

And today are answer is the price just went up. We are holding our selling price at 3.50 a gallon, and we do have some fuel on hand, but forget about making any money by selling it at that price.

Those on the edge of the industry are outraged. They mention conspiracy, and claim our suppliers are “greedy bastards,” and would love to cite their constitutional right to cheap fuel. Too bad the founding fathers left that part out. My understanding is they felt markets were an efficient way to deliver goods to those in need.

North Carolina is the fifth largest biodiesel consuming state in the country. Its state contract stipulates that the fuel sold here will come from soy. And the state contract has been awarded to World Energy in the west, and Potter Oil in the east.

We are in the middle, and tend to buy from World Energy. World Energy cannot ship non-soy based fuel into North Carolina, since most of their customers are buying on state contract. Potter Oil gets a lot of its supply from West Central Soy, who has customers on allocation right now.

Apart from an idiotic state contract—that really should be feedstock neutral, why are there shortages of biodiesel right now?

And the answer comes back to tax credits, the price of petroleum, and the Policy Layer. Some suppliers, including West Central Soy, have passed along a 1.00 per gallon savings to their customers. In some instances that has put their price at the rack (the terminal where fuel is wholesaled) at a lower price than diesel fuel.

Diesel fuel is high right now based not only on 57.00 per barrel crude on world markets, but also on increasing demand from both China and India. Their economies have a higher percentage dependency on diesel fuel in the first place, and as they grow, they are competing with the U.S. for fuel. I should also point out that a lot of the costs in the production of biodiesel come from petroleum in the first place. The boats that import soy beans from Brazil are powered by petroleum, as are the trains and tank trucks that deliver B100 to market. I’ve even seen grassroots biodiesel operations use petroleum to get their work done.

In those instances where biodiesel is cheaper than petroleum, it gets snapped up by the general public, rather than those dedicated to biodiesel. Construction fleets, cement makers, and transportation intensive industries of all types—the same ones who were previously afraid to let B2 touch their precious engines, are buying biodiesel to reduce their fuel costs.

Since I am quick to blame the “Policy Layer” for setting the price of energy, I should say that progressive legislation in Minnesota and Illinois has also contributed mightily to demand. Minnesota did it with a mandate for biodiesel usage in state vehicles, and Illinois has done it with a tax holiday.

And with that demand, biodiesel is in shortage mode.

All of which doesn’t fundamentally answer the question of when will the price of biodiesel fall? Simple: when there is a surplus.

Biodiesel pricing will come down when petroleum demand eases (if it ever does). Or when the production capacity in this country increases. Before people freak out about their God-given right to cheap fuel, they need to realize that this is how the industry is birthed. One of the reasons Europe has a biodiesel industry, while ours is merely fledgling, is that governments there used policy levers to make biodiesel more economical than petroleum.

And as for production capacity? We are working on it.

Posted by Lyle at April 6, 2005 09:11 PM