Investing in biodiesel: The ultimate growth industry

Andrew Snyder - Thu 17 Aug, 2006

...Biodiesel is quickly gaining in popularity. It is one of the most promising alternative fuel source. Biodiesel is already trickling into fuel tanks across the US and in Europe. Soon, you won't be able to avoid it...There are lots of players in the biodiesel industry, some quite big, some extremely small. Keep your eye on biodiesel growth in Europe, it’s soaring...

 
 
Rising fuel prices are hurting us all. As crude prices steadily climbed from $40, to $50, to $60, and now well over $75, the sighs coming from consumers around the world got louder and louder.

It is now downright painful to watch the figures race up as we pour gallons of fuel into our petrol tanks, only to watch them float out the exhaust pipe as we pull away and trudge through lanes of traffic. While the extra £10, £20, or £30 we spend at each fill- up hurts, imagine what it is doing to the large consumers of fuel. Think about the haulage and marine industries that burn huge amounts of diesel each and every day... more than you and I will use in our lifetime.

America alone burns over 4.1 million barrels of diesel per day. That is over 172 million gallons. Since diesel prices began to surge a few years ago, the price increase costs the US economy roughly $300 million in extra fuel costs each and every day. The figures are astounding, if not absurd. Fortunately, they may be going down very soon. Biodiesel is quickly gaining in popularity. It is one of the most promising alternative fuel source.

Biodiesel is already trickling into fuel tanks across the US and in Europe. Soon, you won't be able to avoid it.

I first learned of biodiesel while hanging out at a popular marina in the spring of 2000. All the local captains were talking about a new type of diesel just delivered. Some were nervous. Some were excited.

Investing in biodiesel: Far cheaper than normal diesel

But before long, they were all smiling. The biodiesel that they received was drastically cheaper than the conventional diesel they were using. Since then, the popularity of biodiesel has spread like wildfire. When I first heard of it, America was producing less than 10 million gallons of the fuel each year. Last year, the United States produced approximately 50 million gallons, worth a total of $83 million.

Amazingly, biodiesel production has more than doubled every year since 1999. That trend is not going to stop anytime soon. The US Department of Agriculture expects biodiesel production to reach 800 million gallons by the end of the decade. When it does, this fledgling industry will be worth over $2 billion in revenues each year. Even better is the long-term growth potential.

Current diesel consumption in the United States is more than 1.5 billion gallons per year. Today's biodiesel production will be forced to expand thirty-fold if it wants to catch up. There is no reason that all of the world's diesel can't be biodiesel. The fuel is quickly gaining popularity, not only because it is almost a direct substitute for crude- based diesel, but also because it is drastically cleaner. Engines running on biodiesel put far fewer pollutants like sulphur and carbon monoxide into the air.

Biodiesel is less toxic than table salt and biodegrades faster than sugar. Plus, it doesn't have that pungent smell we all correlate with traditional diesel.

So what exactly is biodiesel? Well, to be technical, it is the mono-alkyl esters of fatty acids derived from vegetable oils or animal fats. In simple terms, the fuel is what you get when you combine some form of alcohol with animal fat or vegetable oil. The feedstock of choice (what the vegetable oil is derived from) in the United States is soybeans. They are abundant, fairly inexpensive, and can be easily combined with methanol to create biodiesel.

Investing in biodiesel: Plenty of profits to be made

But not everybody is using soybeans. Some innovative companies are looking at a wide variety of feedstocks. That way, when soybean demand — and therefore, prices — go up, they have a cheaper alternative. For these producers, animal fat known as tallow is among the favourites.

Tallow is less abundant than soybeans, but it is dramatically cheaper (about 10 cents per pound). Because it takes roughly eight pounds of soybean oil to create a gallon of biodiesel, companies using tallow have a competitive edge of roughly 80 cents per gallon. Right now, that competitive edge is merely a luxurious boost to profit margins. But soon it may be the only thing keeping many biodiesel companies in business.

In 2008, the US Congress is set to vote on the removal of a dollar-per-gallon subsidy for the biodiesel industry. If it is repealed like many legislators would like, many biodiesel manufacturers could be looking at big losses. For most of the industry, this subsidy is the only thing that allows biodiesel to compete with cheaper crude-based diesel.

While it is something to keep in mind, the subsidy will be in place for at least another year and a half. That means there are plenty of great profits still left to be made.

There are lots of players in the biodiesel industry, some quite big, some extremely small. Keep your eye on biodiesel growth in Europe... it’s soaring. Light-duty diesel consumption is nearly twice as high in Europe. As it becomes more and more prevalent overseas, the fuel will certainly catch on in the States too.

Consumers burn roughly 1.5 billion gallons of diesel each year in the United States. Someday, the vast majority of it will be biodiesel. Representing only a tiny fraction of today's diesel market, biodiesel is the ultimate growth industry.


Warm regards,

Andrew Snyder
for The Daily Reckoning