Both Rudolf Diesel and Henry Ford incorporated biofuels in their early designs. When Rudolf Diesel first displayed his diesel engine at the World Exhibition in 1900, it was designed to run on peanut oil. Later, Henry Ford followed suit and designed the Model T to run on ethanol and gasoline.

For most of the remainder of the twentieth century, neither ethanol nor biodiesel received much attention in the United States.

This began to change for the ethanol industry in the early 1980s after governments recognized that support for non-petroleum-based motor fuels could lessen US dependence on imported oil and produce environmental benefits. In the 1990s, the banning of MTBE, a petroleum additive that, like ethanol, is used by refiners to comply with federal clean air regulations, provided a further impetus for growth of the ethanol industry.

Biodiesel appears to be on the verge of benefiting from similar trends. In particular, new environmental regulations that require the use of ultra-low sulfur diesel fuel in the United States beginning in June 2006 should spur more biodiesel production.

Biodiesel also enjoys bipartisan political support. President Bush used a biodiesel plant in Virginia in the spring as a prop for a speech encouraging Congress to pass an energy bill. A “biofuels caucus” has also been formed in the Senate with Norm Coleman (R-Minnesota), Tom Harkin (D-Iowa), Blanche Lincoln (D-Arkansas) and Jim Talent (R-Missouri) as the “co-chairs.”

Notwithstanding this political support, biodiesel production in the United States is still in its infancy. Total biodiesel sales in 2004 were only 30 million gallons. Although this was a 60-fold increase over output five years ago, the US Department of Energy has forecast that the market could reach as much as 1.2 billion gallons a year in the next decade. This forecasted growth is likely to depend to a great extent on the continuation of government subsidies and advances in the use of different feedstocks.

What is Biodiesel?

Biodiesel is a cleaner-burning diesel replacement fuel that is made from natural, renewable sources such as animal fats, oilseeds, used cooking oil, sugar and grain. The most common feedstock used in the US is soybean oil, while the most common feedstock used in Europe is rapeseed oil.

Biodiesel fuel alone, or in combination with petroleum diesel fuel, can be used in most diesel engines with little or no engine modification. Americans currently use biodiesel blended with standard diesel in percentages of 2% to 20%. Such blends are referred to as B2 to B20. In certain circumstances unmixed biodiesel, or B100, is being used by consumers. The majority of European consumption is B5, or a 5% blend of biodiesel.

How is it Made?

As shown in the diagram on the next page, biodiesel fuel can be made from new or used vegetable oils and animal fats. Vegetable oils, when made to react chemically with methanol or another alcohol, produce chemical compounds known as esters. This process is known as transesterification. During transesterification, the vegetable oil or animal fat is filtered, preprocessed with alkali to remove free fatty acids, and then mixed with an alcohol and a catalyst (usually sodium or potassium hydroxide). The oil’s triglycerides and the alcohol react to form esters and glycerol, which are then separated from each other and purified.

Biodiesel is the name given to the esters formed by transesterification when they are intended for use as fuel. Glycerol, produced as a co-product, is used primarily in pharmaceuticals and cosmetics.

Although the primary feedstock in the U.S. is soybeans, waste animal fats and used frying oil, known as yellow grease, are also potential feedstocks. These are less expensive than soybean oil and are being considered as a way to reduce feedstock costs. Peanuts, cottonseed, sunflower seeds, and canola (a variant of rapeseed) are other candidate oil sources.

Government Subsidies

The JOBS Act last October created for the first time a federal excise tax credit for biodiesel blends, and the energy bill that President Bush signed in August extended it. The credit can be claimed on biodiesel blends sold through December 2008. The US government collects an excise tax of 24.4¢ a gallon on diesel fuel. Refiners who use biodiesel to blend with petroleum diesel can claim a credit against the excise taxes that would otherwise have to be paid on the resulting diesel fuel. The credit is $1 a gallon for “agri-biodiesel,” and it is 50¢ a gallon for other biodiesel. This is the amount of tax credit for each gallon of biodiesel used in the blend. Thus, for example, if a B5 blend is used, then 5% of a gallon of biodiesel was used to make the diesel fuel. A credit of 5¢ or 2.5¢ could be claimed against the 24.4¢ tax on diesel fuel, depending on whether agri-biodiesel was used. “Agri-biodiesel” means biodiesel derived solely from virgin oils, including oils from corn, soybeans, sunflower seeds, cottonseeds, canola, crambe, rapeseeds, safflowers, flaxseeds, rice bran, mustard seeds or animal fats.

Potential US Market

Biodiesel has several advantages over traditional petroleum diesel fuel. First, it is a cleaner burning fuel than petroleum diesel, even in low blends. According to the US Department of Energy, pure biodiesel can reduce air toxics and cancer-causing compounds by 94%, while B20 results in a 27% reduction. Second, biodiesel has a much higher flashpoint than petroleum diesel fuel. As such, it is not considered a flammable fuel and, therefore, is not considered a hazardous material by the National Fire Protection Agency, and no hazardous-material labeling is required during transportation and storage. Third, biodiesel maintains all of the lubricity benefits of petroleum diesel, and even low-level blends, such as B20, result in minimum degradation of power and range when compared with traditional petroleum diesel. For instance, the power of B20 is only about 2% less than that of regular diesel. Fourth, biodiesel has many proponents in the environmental community. Biodiesel is made from natural and renewable sources, is biodegradable and non-toxic and is not harmful to the environment in the event of a spill. In fact, accidental spills of pure biodiesel take only four weeks to decompose completely. This is approximately four times faster than the rate at which petroleum diesel decomposes.

Biodiesel production is expected to reach 124 million gallons this year compared to 30 million gallons during 2004. This is still a very small percentage of the potential US market. On-road petroleum diesel consumption totaled approximately 36 billion gallons in 2004, and the total US diesel market (which includes on and off-road uses) is estimated at $160 billion.

US refiners have been slow to recognize the potential. European biodiesel production for 2004 was estimated at 500 million gallons.

Several government actions are expected to give a boost to the US market.

One is a renewable fuels standard in the new energy bill that became law on August 8 that requires refiners to blend minimum volumes of either ethanol or biodiesel with US motor fuels through 2012. The other is a new small producer tax credit of 10¢ per gallon.

The states are also providing support for biodiesel. Approximately half of US states sponsor alternative fuel vehicle programs that promote the use of blends of B20 or greater. For example, Missouri requires that at least 75% of government vehicles use biodiesel, if available. Many states also make grants to school districts to buy biodiesel fuel for use in school system vehicles.

Perhaps most significantly, biodiesel blends may become the fuel of choice to comply with new ultra-low sulfur diesel regulations. The US Environmental Protection Agency is requiring refiners to produce highway-grade ultra-low sulfur diesel starting in June 2006.

Refiners have the option to produce ultra-low sulfur diesel by “de-sulfurizing” the diesel using a “hydro-treating” process. Hydro-treating is the process of replacing sulfur in diesel fuel with hydrogen. This process requires boiling base oil stocks at temperatures ranging from 500° to 600° Fahrenheit and then subjecting them to high pressure. Although most refineries already use “hydro-treating” technology to produce the current standard of diesel fuel with 500ppm of sulfur, it requires a significant capital investment and ongoing expense to reach the new standard of 15ppm. In addition, during hydro-treating, nitrogen and oxygen, which provide a natural lubricity to the diesel, are removed from the fuel. Unless a lubricant, like biodiesel, is added, the reduced lubricity could damage engine parts.

Risks

Biodiesel is not economic to produce currently without government subsidies. In such a market, there is obviously risk. The price differential between biodiesel blends and petroleum diesel fuel is small in blends such as B5, and any price advantage enjoyed by petroleum diesel fuel is eliminated as long as the current excise tax credit remains available. However, these calculations assume that the price of soybeans will remain stable. It may not if demand increases significantly due to use of soybeans to make biodiesel. One gallon of biodiesel requires 1.5 bushels of soybeans to make. More than 20% of the entire soybean crop in the United States would have had to have been used in 2002 to provide a 2% blend for all diesel fuel consumed in the US that year.

Fortunately, one characteristic that distinguishes biodiesel from other fuel replacements, such as ethanol, is that various feedstocks can readily be substituted for one another without significantly modifying the design of the production facility or process. For example, other oil-producing crops that can be readily substituted for soybeans include oil palm, jatropha, canola, peanuts, sunflowers, safflowers, mustard, corn and algae. Many industry participants are aware of this issue and are looking at the economics of importing palm oil from Asia as a soy oil substitute

Producers may also be able to reduce their feedstock costs in the longer term if scientists are able to engineer soybeans or other crops to produce more oil. This approach has already led to corn with a higher starch content, which lowers the cost of producing ethanol.