Biodiesel Industry Looking Forward to 2011 (GEVO, AMRS, DD, CVX, BP, RDS-A, ADM)

Only a few years ago most of us associated biodiesel with recycling of used cooking oil to produce a transportation fuel that Willie Nelson used on his tour bus. The exhaust smelled an awful lot like french fries. Things have change since then.

Biodiesel is still made from used cooking oil or from oil-heavy crops like soybeans and jatropha, but the current wave of development is aimed more at either developing genetically modified catalysts that will convert bio-mass to a basic compound that can be refined into a variety of products, including biodiesel. Gevo, Inc. (NASDAQ: GEVO) and Amyris, Inc. (NASDAQ: AMRS) are two pure-plays in the renewable products space, but there is also competition from some big guys. EI DuPont de Nemours & Co. (NYSE: DD), Chevron Corp. (NYSE: CVX), BP plc (NYSE: BP), Royal Dutch Shell plc (NYSE: RDS-A), and Archer Daniels Midland Co. (NYSE: ADM), among many others, all have a dog in this hunt.

The re-instatement of the $1/gallon biodiesel tax credit was approved in December as part of the tax reform bill passed by Congress and signed by the President. The deal included a retroactive federal credit for 2010 production, as well as a credit for 2011 production.

According to an industry group called the National Biodiesel Board, the coming year is going to be a good one for biodiesel makers.  As the NBB notes, US capacity to make biodiesel now stands at 2.5 billion gallons annually.

Although 2.5 billion gallons is decent number, it represents just a little more than 3 days worth of US demand, or less than 1% of total US annual demand. It will take years to scale production to a point where it makes a difference in US consumption of petroleum.

That’s not to say that biofuels, including biodiesel, are not worth the trouble. Biodiesel, in fact, may be one of the more sensible approaches to reducing US dependence on imported oil and reducing emissions. A blend of 11% or greater of biodiesel with ultra-low sulfur heating oil produces about lower carbon emissions than natural gas. The Connecticut legislature passed a law last year requiring a 2% blend of biodiesel in 2011, rising to 20% by 2020. However, the law won’t go into effect until Massachusetts, New York, and Rhode Island enact similar legislation.

Biodiesel’s impact on petroleum consumption and carbon emissions could be important to an overall US energy policy. If the US actually had an energy policy.

Paul Ausick