by Barnaby Meins

helium.com

Americans have long wondered what the future of the energy industry holds for their country. There are many renewable alternative energy sources to petroleum, of which, biomass is fast becoming a major opportunity for investors. In the biomass energy segment, biodiesel is a key area which many are starting to focus on. For one to answer whether America should invest in bio diesel in a big way, we need to explore the benefits and drawbacks before coming to a conclusion.

In general, biodiesel is a biofuel made for diesel-powered machines. Chemically speaking, they are monoalkyl esters of long-chain fatty acids from transesterification of oils derived from renewable lipid feedstocks, such as palm oil, soybeans and jatropha.

-Benefits of biodiesel-
Biodiesel is a clean and renewable fuel to other energy sources like petroleum, which means using it reduces air pollution and relieves fossil fuels reliance. Jatropha nut has been an increasing favourite raw material over others for biodiesel production because the plant can survive in tough conditions and it is inedible. Thus, it will not compete with other crops for valuable fertile land and the production will not be at the deprivation of food supplies. There are developing new technologies, such as, enzymes usage to speed up the production rate, removing the extreme condition requirements.

According to a United Nations official, biofuels like biodiesel is expected to provide for 25% of the world’s energy needs (Paul, 2007). Although the use of biodiesel locally is still in its infancy, biodiesel is projected to serve ready markets in Asia, Europe and United States. The European Union has mandated that 2% of petrol-based diesel must be mixed with biodiesel (Seng, 2007). There are plans to augment biodiesel blend to 5% in South Korea and to tighten diesel sulphur standards in Japan (Chan, 2007). Already, biodiesel blends is compulsory in Thailand while India wants to substitute 5% of the diesel consumption with biodiesel (Mukherji and Ramachandran, 2006). As such, the emergent biodiesel market is estimated to be worth US$1 trillion by 2020 (Wong, 2006).

Besides, biodiesel’s byproduct, glycerin is used to make plastics, cosmetics and drugs (Seng, 2007). Interestingly, jatropha’s medical properties can be utilised for the treatment of infections and body aches (Mukherji and Ramachandran, 2006).

-Uncertainty in biodiesel business-
Rising prices of the biodiesel supplies and decreasing diesel price is shaking investors’ confidence. Feedstock’s costs comprise 80% of biodiesel production and investment analysts have stated that palm oil diesel can remain lucrative only if palm oil, a raw material for biodiesel, is below US$450/ton (Foo, 2007). From 2006, the price of palm oil has increased to US$556/ton (Thukral, 2007). Moreover, regular diesel prices have dropped by 23% (Reuters, 2006)

It seems that investors should worry about investing in biodiesel, which business is yet to be well-established. The delisting of British Biofuels Corporation (Hille et al., 2007) and operations below 50% capacity for Peter Cremer’s plant due to present costs (EEI, 2007) point towards a doubtful future.

Nonetheless, any price hike is temporary and is bound to fall. In the long run, although profits of biodiesel production will be affected by the fluctuating prices, financial instruments can be considered to hedge any feedstock price increase. Government subsidies will provide relief to tide over difficult times as in the case of Wilmar International’s biodiesel business which expects $45 million profit despite negative margins (Leng, 2007). Hedging from volatile supplies and variable prices can take the form of feedstock cultivation, embracing emerging technology to improve production efficiency and using jatropha which price is half that of palm oil while its yield is much higher than soybeans (Seng, 2007).

Even if biodiesel production is infeasible, the production plants can be adapted into refineries at low costs (Leng, 2007). Besides, profitability can be enhanced with other income streams from side-products as mentioned earlier.

- Premium pricing drawback-
Biodiesel is expected to be more costly for consumers as it carries a premium for being a clean and renewable fuel to petroleum. It is predicted the demand will not be as high as expected. However, compulsory rules on blending in foreign countries, as mentioned earlier, will compel biodiesel consumption.

While there are concerns that costs is raised with the retrofitting of vehicles to run on biodiesel, most vehicles today can actually process blended diesel. Experts state that biodiesel and petroleum diesel cost the same at about US$600/tonne (Channel NewsAsia, 2007). Furthermore, biodiesel blending bodes well for countries, where people are increasing aware of protecting the Earth.

-Conclusion-
In all, America should invest in bio diesel in a big way mainly because of the global push for cleaner fuel and the favorable American conditions to do so. Potential losses can be avoided by hedging while concerns over costly biodiesel remain largely unfounded.

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This entry was posted on Thursday, January 31st, 2008 at 11:19 am and is filed under Palm Oil Biofuel News. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.