Going Biodiesel Is No Cheap Alternative

The retail cost of highway diesel fuel is $3.99 per gallon—thanks to tough environmental rules and strong global demand, especially in Europe. The national average retail price of diesel hit an all-time high for five weeks in a row, is above $4 per gallon in plenty of places, and is up 50 percent over one year ago.

I thought this might make it a good market for biodiesel, the alternative fuel blended from vegetable or plant oils, but then I saw Autobloggreen's report on a Minnesota biodiesel plant that was halting production, at least temporarily, because of skyrocketing soybean oil costs.

Guess what? Petroleum prices have yanked farm prices up right along with them, because of rising farm energy costs and rising use of biofuels. By now, everyone knows about corn prices and ethanol, but keep in mind that when farmers turn soy acres to corn for ethanol, that means higher prices for soy—the most common feedstock for biodiesel in the United States. So the rising petroleum tide lifts all alternative boats.

Spencer Kelly, ethanol and biodiesel editor for the Oil Price Information Service, the private tracking firm, says that the average rack price—that's wholesale—for biodiesel has been running about $4.64 per gallon. Compare that with the wholesale price of highway diesel—$3.31 per gallon. Even if the seller passed along to the buyer the entire $1-per-gallon federal subsidy, biodiesel would still be more expensive than the diesel made from crude oil.

"You'd think this is a perfect environment for biodiesel, but no—it still can't compete with petroleum, even in this market," Kelly says. And that situation is not likely to get better soon. That's because, as Kelly points out, even though biodiesel prices have gone up substantially, "it's still unprofitable for producers, because of the feedstock costs." At current soy oil prices, Kelly says, a producer is paying $3.90 per gallon in feedstock costs—substantially more than the wholesale price of petroleum diesel. Many producers, like the SoyMor plant in Minnesota, have shut down or pulled back on production. "Production is way below capacity," Kelly says.

So the price landscape for biodiesel has gotten even worse than it was just before Iraq war, when I wrote about how difficult it was for an Arizona businessman who wanted to go green, when biodiesel cost 70 cents per gallon more than petroleum diesel. (By the way, it is quaint to look at what the price of petroleum diesel when that story was written in February 2003: about $1.70 per gallon. It's up 135 percent since then.)

Biodiesel use continues to grow, driven both by federal policy and by those who feel it will make a positive environmental difference. Most recently, grocery chain Safeway announced it will convert its entire 1,000-truck fleet to a 20 percent blend of biodiesel—aiming to reduce its carbon dioxide emissions by 75 million pounds, the equivalent of taking nearly 7,500 passenger cars off the road each year. Safeway has acknowledged it is paying a higher price for the fuel alternative but views the cost difference as "manageable." Yet for the nation as a whole, the quest continues for a manageable alternative fuel future, and that can't happen without alternatives that are cheaper than oil.