World Grain - February 2013 - 102

FEATURE: FUTURE OF FUELS FOR U.S. FREIGHT TRANSPORT

some states also mandate the use
of biodiesel.
To track the sales of renewable fuel
production (biodiesel), the EPA created
the renewable identiﬁcation number
(RIN) system. All EPA registered producers of biodiesel may create an RIN
for each gallon produced. RINs have
value to “obligated parties” to satisfy
their renewable volume obligation under the Renewable Fuel Standard legislation. Most biodiesel is sold with its
RIN attached. RINs may also be sold
as a separate commodity. On Dec. 31,
2011, RINs contributed approximately
$1.83, or 38%, of the average Jacobsen
B100 Upper Midwest spot price of a
gallon of biodiesel.
The blender’s tax credit also provided a $1 excise tax credit per gallon
of 100% biodiesel to the ﬁrst person
who blended biodiesel with petroleum-based diesel fuel. This tax credit

expired on Dec. 31, 2011 and was renewed on Jan. 1, 2013.
A common blend, B10, is 10%
biodiesel and 90% petroleum diesel.
Blends can range from B1 to B99. The
main reason for blending these two
fuels is the federal government blending mandates. Second, the biodiesel
helps improve the lubricity of low
sulfur petroleum-based diesel. Third,
blending reduces the “cloud point” of
biodiesel. The cloud point is the temperature below which a fuel becomes
cloudy. Cloudiness indicates that the
fuel is likely to gel. This could lead to
plugged fuel ﬁlters and other problems.
Biodiesel begins to gel at 30 to 60 degrees F. The cloud point for diesel fuel
is below 20 degrees F.
Another issue with biodiesel is that
it contains oxygen. Oxygen makes the
fuel crystallize in cold temperatures and
over time. The crystals can clog engine

fuel delivery systems. A good biodiesel
management program is needed to prevent these problems.
There are limited supplies of lowcost feedstocks to produce biodiesel.
Some contend that ﬁnding feedstocks
to produce the 2013 mandated blending 1.28 billion gallons of biodiesel
may be tricky. The supply of inedible
corn oil will top out at 300 million gallons of biodiesel. The meat packing
industry will supply enough animal
fats to produce 400 million gallons of
biodiesel. The remaining 580 million
gallons will need to come from used
cooking oils and virgin soybean and/
or canola oil. The EPA believes that
the additional soybean oil will come
from reduced U.S. soybean exports,
yet world demand for virgin vegetable
oil is increasing. If this scenario plays
out, biodiesel producers will be forced
to compete with international vegetable oil buyers for virgin vegetable oils.
This suggests that biodiesel producers could face higher prices for virgin
vegetable oils and inedible feedstocks
to meet the mandated 1.28 billion gallons of biodiesel. Potential shortages of
biodiesel feedstocks could increase the
costs of biodiesel production.
A fundamental principle of economics is that a ﬁrm will not produce a product if the price it receives is equal to or
less than the variable cost of producing
that product. The logic is that a ﬁrm
will only produce a product if the price
it receives covers its variable costs per
unit of output and, at least, some of its
ﬁxed costs. If the REG variable cost of
production is its 2011 $4.64 per gallon,
and the wholesale price of diesel fuel
is $2.82, REG is likely to shut down
some of its high-cost plants after the
EPA-mandated blending of 1.28 billion
gallons is reached. Wholesale buyers
would no longer be forced to pay more
for biodiesel than the wholesale price of
petroleum diesel.
RENEWABLE DIESEL
Renewable diesel usually refers to
hydro-treated vegetable oils or animal

For more information, see Page 126.

102

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