If you listen closely, you'll hear a cry from the heartland of America. It's coming from the farmers, Willie Nelson, and lobbyists for Archer Daniels Midland (NYSE: ADM ) . It rings out, "Biodiesel, save us from imported oil." This week, that cry hit home with Big Oil.
MotivaEnterprises -- a joint venture between Royal Dutch Shell (NYSE: RDS-A ) and Saudi Aramco -- has begun blending biodiesel with petroleum-based diesel at its terminal in Dallas. This is the first time that a major oil company has worked directly with the biodiesel industry, and it may indicate that biodiesel has finally arrived.
Biodiesel is a cousin to the more widely known biofuel ethanol. Both are made from farm crops, but that's where the similarity ends. Ethanol is typically made from corn in a distillation process not unlike brewing moonshine. Biodiesel is typically made from soybeans in a chemical process (link opens a PDF file), and the product is more like vegetable oil. Ethanol is sold in two blends: E10 (10% ethanol), which can run in any gasoline engine; and E85 (85% ethanol), which can run only in an E85-compatible engine. Biodiesel can be blended in any percentage with petroleum-based diesel and can run in any diesel engine. It is currently used in its pure form (B100) or in one of two blends -- B5 (5% biodiesel) and B20 (20% biodiesel).
Willie Nelson is promoting the use of biodiesel through his BioWillie brand, which is part of Earth Biofuels. Nelson claims that biodiesel will put American farmers back to work and reduce our dependence on foreign oil. Additional benefits of biodiesel include reduced emissions, increased lubricity, and similar fuel economy (link opens a PDF file) to petroleum-based diesel. This last point is a big benefit compared to ethanol biofuels, which have a significantly lower energy content than pure gasoline.
The major downside at present is that biodiesel still costs more than petroleum diesel and requires tax incentives to be available at a competitive price. If oil prices continue rising and oil refinery utilization remains near 95%, the price discrepancy may disappear over time. Availability and production capacity, while rapidly growing, remain problematic. Biodiesel is available only at 600 locations nationwide, while current production is 75 million gallons (link opens a PDF file) per year.
Back to Big Oil
Where does Big Oil fit into all of this? Basically, the Motiva deal involves incorporating biodiesel into the refiner's blending and terminal operation. Motiva is not making the biodiesel, and I doubt that the big oil companies will start making the product. My bet is that Motiva thinks there is sufficient demand for the product to run it in a test market. If the test is successful, I see no reason why oil companies would oppose biodiesel, since diesel represents only a relatively small amount of total refinery output in the U.S. Adding a clean-burning alternative fuel will help meet growing diesel demand without the need for adding refining capacity, which is difficult at best.
Will biodiesel save us from imported oil? The volumes of biodiesel are too small, even if they double for several years, to reduce imports. However, in government language, a biodiesel flood will at least slow the growth of imports.
If I were to invest in this space, I'd take a look at Archer Daniels Midland, soybean king Bunge (NYSE: BG ) , or farm machinery king Deere (NYSE: DE ) . Alternatively, I might just buy a house in Iowa and live the good life.
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