Biodiesel to drive up the price of cooking oil

The popularity of biodiesel--made from vegetable matter intead of fossil fuels--"will tighten the supply of vegetable oils," William Camp, executive vice president of Archer Daniels Midland, said during a presentation at the ThinkEquity Partners Growth Conference in San Francisco.

Because agricultural prices typically fluctuate with supply levels, the vegetable oil shortage could cause food prices to rise.

Martin Tobias, CEO of Seattle-based biodiesel start-up Imperium Renewables, agreed. Vegetable oil prices have declined in the past three weeks because projected demand for biodiesel has come down from the speculative levels achieved a few weeks ago. Nonetheless, lowered levels of projected demand still seem destined to make supply difficult.

"I do think there will be a crimp in vegetable oil supplies in three to five years," said Tobias, who once worked at Microsoft.

According to Camp, part of the problem is the amount of oil required. It takes 7.5 pounds of oil to make one gallon of biodiesel.

Next, add the expansion plans. Archer Daniels Midland has already installed capacity to produce 300 million gallons of biodiesel in Europe and 135 million gallons in the U.S. It plans to open a plant to turn soybeans into biodiesel in Missouri and one to turn canola oil into biodiesel in North Dakota. Oils currently exported for food will get consumed domestically as fuel, Camp predicted.

Imperium says it will be capable of producing 100 million gallons per year by the second quarter of next year and is in the midst of negotiating the purchase of large tracts of land for refining biodiesel in North and South America.

Biodiesel's growing share
Right now, biodiesel doesn't total so much as a rounding error in the overall diesel market, Tobias said. About 62 billion gallons of diesel are consumed annually in the U.S. and 85 billion gallons are consumed in Europe. The total worldwide biodiesel production is 75 million gallons.

Biodiesel, however, should grow to 2 billion gallons in the U.S and 2.5 billion gallons in Europe by 2010, he said. Regulations reducing greenhouse gases are driving demand in both markets. At the tailpipe, biodiesel puts out 43 percent less carbon monoxide and 55 percent fewer particulates.

Biodiesel, if made correctly, can also be less expensive than standard diesel, Tobias said. Most biodiesel manufacturers churn out the fuel for about $64 a barrel. A barrel of Imperium is equivalent to a barrel of crude at $54.5. Next year, Imperium will drop prices to $30 to $40 a barrel. The government currently pays a 99 cents-per-gallon subsidy to biodiesel manufacturers.

"We've been cheaper than diesel for the year," he said. "At $30 to $40 crude equivalent, we should be able to compete with crude all day long."

Imperium's prices are lower because they can use a variety of feedstocks. The company can make biodiesel out of palm, canola or soybean oil. Palm is the cheapest to buy, but the refining is a bit more complex.

Also, Imperium produces its biodiesel in a pressurized vat rather than an open vat, as some providers do. And by locating its plants near seaports, the company puts its biodiesel on tankers and ships it more cheaply. Refiners in the Midwest have to rely on trucks.

Biodiesel, Tobias further asserted, is a better alternative than ethanol. The capital expenditure is about 50 cents per gallon for biodiesel and $2 per gallon for ethanol. Biodiesel is also compatible with existing diesel trucks and buses. Gas-powered cars can handle only a small amount of ethanol and only a few high-ethanol cars are on the market.

Next year, European car manufacturers will bring to the U.S. more clean diesel cars, which produce fewer fumes than conventional diesel-engine cars. Clean diesels can also run on biodiesel, producing even fewer fumes.

"A clean diesel gets better mileage than a hybrid," he said.