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Market Penetration of Biodiesel
Kenneth R. Szulczyk, Ph.D.
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
Why Biodiesel?
• U.S. Petroleum Production– 1,000s of barrels– Peaked in 1970s
1940 1960 1980 2000
Year
2,000,000
2,500,000
3,000,000
3,500,000
Th
ou
sa
nd
s o
f B
arr
els
Why Biodiesel?
• U.S. Petroleum Imports– 1,000s of barrels– 1960 to 2005– OPEC– Non-OPEC sources
1960 1970 1980 1990 2000
Year
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000OPEC Oil ImportsNon-OPEC Oil ImportsTotal Crude Oil Imports
tho
usa
nd
s o
f b
arr
els
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
Biodiesel Recycles Carbon Dioxide
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)
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
Paper’s Purpose
• Could biodiesel feasibly replace fossil fuel?– Predict market penetration of biodiesel into
the U.S. diesel fuel market
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
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
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
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
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
Soybean Markets
Corn Markets
• Corn– Export markets– Animal feed markets– Ethanol industry
• Substitute for gasoline
– Corn wet mill• Produces a variety of products
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
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
Corn Markets
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
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
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
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
FASOM-GHG
• 56 primary products markets– Agricultural and animal industries
• 39 secondary products markets– Producers process primary products into
finished products
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
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
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
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
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
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
Predicted Market Penetration(millions biodiesel gallons)
Gasoline
Price
2000 2005 2010 2015
$1.00 /
gallon
0 9.62 68.21 116.16
$1.50 11.92 264.39 87.10 595.77
$2.00 529.47 755.01 471.43 1,077.85
$3.00 1,262.66 1,456.48 1,421.77 1,803.37
2000 2004 2008 2012 2016
Time
0
500
1,000
1,500
Gasoline $1.00Gasoline $1.50Gasoline $2.00Gasoline $3.00
mill
ion
ga
llon
s
Predicted Market Penetration
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
Predicted Market Penetration
• Setting Gasoline price to $3 per gallon– View sources of biodiesel
Predicted Market Penetration(millions of gallons)
Biodiesel 2000 2005 2010 2015
Soy Oil 1,130 1,237 1,148 1,394
Corn Oil 0 0 0 30.47
Tallow 17.54 63.51 114.93 158.95
Yellow Grease
115 156.25 158.51 219.65
Predicted Market Penetration
2000 2003 2005 2008 2010 2013 2015
Time
0
400
800
1200
Soy Oil BiodieselCorn Oil BiodieselTallow BiodieselYellow Grease Biodiesel
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
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
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.
