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Thought this might be of interest to some re biodiesel market

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May 12th 2005  

Diesel fuel made from oilseeds, petrol replaced by ethanol made from
corn, sugar or grain--or even straw. They're here and are starting to
change energy markets

AMERICAN output of maize-based ethanol is rising by 30% a year. Brazil,
long the world leader, is pushing ahead as fast as the sugar crop from
which its ethanol is made will allow. China, though late to start, has
already built the world's biggest ethanol plant, and plans another as
big. Germany, the big producer of biodiesel, is raising output 40-50% a
year. France aims to triple output of the two fuels together by 2007.
Even in backward Britain a smallish biodiesel plant has just come on
stream, and another as big as Europe's biggest is being built. And
after long research a Canadian firm has plans for a full-scale ethanol
plant that will replace today's grain or sugar feedstock with straw.
Output is still tiny compared with that of mineral fuels. But the day
of the biofuel has arrived.

 The reason is simple. Forget greenery or energy security, the grounds
on which governments justify subsidising biofuels. Just take the past
year's soaring price of mineral fuels, subtract the biofuel subsidy,
and the answer is plain: for the user, biofuels are currently cheaper.
Indeed, in America's corn (maize) states, locally produced ethanol is
close to being competitive even without subsidy; imported Brazilian
ethanol could have been so long ago, had not a federal tax credit for
ethanol, originally 54 cents per American gallon, been carefully
balanced by a 54 cent tariff. 

Though production methods are rapidly evolving, the new fuels are new
only in their rampant growth. An engine that Rudolf Diesel showed at
the 1900 World Exhibition in Paris ran on peanut oil, and biodiesel has
been in small-scale use here and there since the 1930s. You can make it
from animal fats, oilseeds, used cooking oil, sugar, grain and more.
Indeed, you can feed your diesel vehicle with cooking oil from the
supermarket and it will run, until (as they will) the filters gunge up.
As for ethanol, Henry Ford was an enthusiast for crop-based ethanol in
the 1920s. 

Modern uses were sparked by the oil shock of 1973. Brazil, rich in
sugar-cane but not oil, led the way, building cars adapted to burn pure
ethanol until the late 1980s, when sliding oil prices and rising sugar
prices made sugar a more profitable end-use for the cane growers and
the subsidy for ethanol too costly for the state. In 1989-90 ethanol
pumps began to run dry, and sales of these cars collapsed. 

Today, both biofuels tend to be used in mixtures. Europeans typically
use "B5"--standard diesel, blended with 5% biodiesel, usually made from
rape (canola) oil. In America, many drivers, often unaware of it, are
using E10 "gasohol"--10% ethanol, 90% standard gasoline. 

But the proportions can be higher than that. Some American and Canadian
public-sector vehicles run on B20. Californians use unmixed, 100%
biodiesel, and, with additives to keep it usable down to -20°C, it is
sold even in such colder places as Germany and Austria. As for ethanol,
in its pure form it can damage standard gaskets and hoses. But, to meet
Brazil's supply problems, carmakers there, already familiar with the
stuff, in 2003 brought in "flex-fuel" engines that can run on any
ethanol-petrol blend you like; at present 75% to 25% is standard. These
now win 30% of new car sales there. The American version of flex-fuel
runs on E85 (in practice, 70-85% ethanol, depending on the region and
the season). Already America has 4m such cars, and they are
multiplying. So are E85 pumps for them. Indeed, the corn-state press
delights in anecdotes of John Doe who habitually fills his ancient
Chevy with E85 and avers that it suffers no harm. 

If he's right, he is no fool: E85 (though not E10) gives a bit less
oomph per gallon than standard fuel, but even so he is saving money.
Supply constraints may prevent E85 being the future of ethanol in
America. But if the oil price stays high, Mr Doe and other
penny-pinchers will certainly be using more biofuel.

 The oil companies were originally far from happy to see "their"
filling stations openly selling a rival fuel. They are still not eager.
But pro-ethanol pressure has grown. America's environmentalists favour
it (except the purists who object, truly enough, that the real "green"
issue there is not the fuel but the cars that guzzle it). And the law,
in some areas, is with them. Anti-smog rules require a clean-burn
additive to petrol, and one formerly favoured, known as MTBE, turned
out to have nasty properties, and is being phased out. Ethanol--as
such, or used roughly half and half with another chemical in a compound
known as ETBE--can do the job. 

There is pressure too from the corn-growers, gleefully envisaging a
huge new market; and hence from their politicians. The market is big
already: of America's 255m tonnes of maize last year, 30m went into
ethanol. One or two states have adopted mandatory requirements for a
certain use of this fuel; Minnesota requires E10 as a minimum, and its
legislature has just voted to make that E20. A federal bill launched in
March, calls for the use of eight billion gallons of biofuels a year by

This and less ambitious bills are still merely bills, not law; and even
eight billion gallons, though near double this year's likely American
output, looks trivial beside total motor fuel use, which already
exceeds 175 billion gallons. Yet if oil stays high that target may be
exceeded, law or no law, greens or no greens, because drivers will
demand ethanol.

The arithmetic is simple. Ethanol's federal tax credit is by now 51
cents per gallon (in European terms, 10.5 euro-cents per litre).
So-called "small" producers, making up to 30m gallons a year, get an
extra 10 cents. Several states add their own tax breaks, which can be
worth 10-20 cents a gallon. Say, very crudely, 70 cents in all: 7 cents
per gallon of E10, and nearly 60 cents for E85. 

The subsidies in theory go mostly to the blender; how much in fact ends
up with whom depends on the market, and is not simple at all. Witness
some figures from filling stations in Minnesota--the E85 capital of
America--in early May. The pump price of the E10 gasoline standard in
that state varied little, from around $1.90 a gallon to $2.10. E85
prices varied more, from about $1.50 to $1.80. And the gap between the
two varied wildly: 26 cents in Austin, 34 in Owatonna, 45 in Eagan and
Shakopee, 50 in Redwood Falls, 58 in Alden.

Say, typically, 35-45 cents and what the figures show is again simple,
and conclusive: at today's prices, in that corn state, the wise driver
buys subsidised E85 ethanol if he can; and it is only 10 cents or so
from being cheaper than standard gasoline even were there no subsidies
at all. 

Other obstacles may be on the way out. Even now, a new flex-fuel car
costs barely more than a standard one. There is little reason for any
real differential, and as these cars gain popularity there may be
none--as in Minnesota already. Guarantees have been a trouble: John Doe
and his Chevy are past caring, but would you buy a brand-new car and
risk invalidating its guarantee by using E85? But the car makers'
attitudes are changing.

Guarantees are especially relevant to America's infant biodiesel
industry. A heavy truck or combine harvester is a big investment to put
at risk. But Case, a leading farm-equipment maker recently extended its
guarantees to B5 (and at another, John Deere, machines leave the
factory filled with B2). Volkswagen has just done likewise, as it and
others did long ago in Europe, for its diesel-engined cars, a rare
species in America, but now spreading. 

American output of biodiesel is still trivial: last year 30m gallons,
in a total on-road diesel consumption of 36 billion. A year ago,
biodiesel cost about 20-30 cents a gallon more than petro-diesel. But
in October a new law gave it too a federal tax credit: one cent for
every 1% of biodiesel in the mix. Oil prices are higher now. And new
rules requiring diesel in 2006 to be all-but free of sulphur will help.
Taking the sulphur out makes the fuel less slippery; adding biodiesel
can make it more so. 

The story has been much the same in Europe, though the leader there is
biodiesel. In Germany, where more than half of all cars are
diesel-engined, pure biodiesel, retailed as such, has long escaped fuel
tax. In January 2004 blends up to B5 were legalised, and the exemption
was extended, pro rata, to them. Per "biolitre", it is now worth
EURO0.47 (in American terms, $2.30 a gallon). Italy takes off 40
euro-cents, France 33 (though both governments set a quota for output),
Spain and Britain 29. 

The public hears little of these tax breaks: in Germany or in
France--where pure biodiesel is not sold--the driver looking for
"diesel" seldom knows, or cares, that he may be getting B5. And even in
Germany the pure stuff is available at only one filling-station in ten,
thanks to the hostility of the oil companies. But where it is, drivers
are eager for it: it is 10-12 euro-cents a litre cheaper than plain
diesel. Big users buy in bulk, to blend for themselves at whatever
percentage they like. And demand from the oil companies, since blending
was authorised, has given Germany's biodiesel producers a huge boost.

As in America, there is also political pressure, though the politics,
so far, is more that of the green lobby than the farmers. The European
Union, unlike the United States, has ratified the Kyoto treaty on
emissions and the environment, and the EU authorities in 2003 issued
indicative targets for translation into national law: 2% of motor-fuel
consumption should be biofuel by 2005, and 5.75% by 2010. 

Many of the 25 EU governments have thumbed their noses at Brussels. In
February, the European Commission sent warnings to 19 for failing to
put their targets into law; and later to nine for not even fixing
targets. Even of those that have, many picked figures below the EU's
hopes. The politics sounds like a typical EU non-event.

In fact, not so: EU governments dislike being tied down by Brussels,
but few will mind tying down their own citizens, or at least cajoling
them with tax breaks. And there is national pressure for that, from
committed greens below and ministers eager to look green above. Even
Britain's government this year extended its biodiesel subsidy to
bioethanol too. France is to enlarge the quotas of biofuel output that
qualify for subsidy. 

Yet in the end it is the market--producers, intermediaries and
consumers--that will decide. And there are already signs that, given
the price signals (and the supply of raw materials) they may in time
leave governments behind.

Really? In America and Europe alike, that today looks far from likely.
And if oil prices slump, the signals will not come. Yet look at the
response, already visible, to the leap in oil prices and the biofuel
savings or profit opportunities it represents.

In America, by late 2005 ethanol capacity may hit 4.4 billion gallons a
year, against 3.4 billion in 2004. There are 84 existing plants, 16
being built, and new projects galore. And while one big grain firm,
ADM, used to dominate the ethanol industry, many are backed by local
farmers, eager for a new outlet as corn prices have slid. In Missouri,
730 farmers put in $24m of $62m needed for a 50m-gallon plant--a size
that reflects the cost of corn transport.

State governments aid such plants. Missouri gives producers 20 cents a
gallon for their first 12.5m gallons, 5 cents for the second. Besides
$7m for an ethanol research centre, and freeing biofuels from state
sales tax on biofuel, Illinois has put $4.8m into one project to help
it raise other capital. North Dakota has done likewise. Predictably,
though, enthusiasm is abruptly reversed if the fuel is not
American-made (or even, in some cases, made from home-state corn). The
import tariff apart, two bills came up in the Senate last year to block
the small volume from Brazil that could avoid it by being partly
processed in the Caribbean basin.

In Europe, Germany's biodiesel producers say output has trebled since
2002 to maybe 1.5m tonnes (about 1.7 billion litres, or 450m American
gallons) this year, as new plants come on stream. The producers say
that by now 4% of all diesel sold there is theirs--over 2% of all motor
fuel already, even if ethanol were never to make its mark there (as it
certainly will).

France's biggest diesel producer, Diester Industrie, already making
250,000 tonnes a year at Europe's biggest plant, near Rouen, plans to
double another plant in the north to 200,000 tonnes, and build a
160,000 tonne one in central France. It is also in talks with Cargill,
an American grain and oilseed giant, about yet another plant at
west-coast Saint-Nazaire.

In Britain, though half of all motor fuel sold is diesel, biodiesel use
has been tiny. But a new 50,000-tonne Scottish plant is due to be
overtaken later this year by a 250,000-tonne monster on Teesside, near
the east coast. And, with partners, Tesco, a supermarket giant that
also runs filling stations, plans another east-coast plant. It will not
be huge, but in Britain Tesco's name could give biofuels a huge boost.

So, in a different way, may the decision of Fortum Oil, part of
Finland's Neste conglomerate, to build a 170,000-tonne biodiesel plant
at its Porvoo refinery near Helsinki, which now makes 4m tonnes of
conventional diesel. The oil companies' war with biofuels has already
become a truce; now it may become an alliance. Not all their skills are
transferable: coastal biofuel plants, like refineries, have an eye on
bulk, seaborne inputs, but most of Europe's biodiesel is made from
rapeseed (or rape oil) brought in by truck, not tanker or pipe. It is
the economics of supply, more than distribution, that inspire the wide
spread and relatively modest size of biofuels plants. But the oilmen
are mighty.

Europe's coming ethanol boom in part reflects a different aspect of
supply: its source. Italy has just cut the total of its biodiesel
output eligible for tax relief, switching the money to ethanol. A
greener fuel? No. But the rape or soya that go into biodiesel are not
common crops in Italy; the grain, sugar or wine used for ethanol are. 

Likewise, France's tax-aided biofuel push will be more ethanol-slanted
than its far bigger biodiesel industry thinks fair. Lo, wheat and sugar
beet, the main inputs for ethanol there, matter far more to French
farmers than rape does. Three new German ethanol plants, due to make
about 500,000 tonnes a year, mostly from rye, will eat near three times
that weight of grain--3% of Germany's total harvest. No wonder the EU's
offer to take a billion litres (near 800,000 tonnes) a year of
Brazilian ethanol duty-free alarms EU farmers; they want imports
limited, as in America, to a percentage of EU output. And as the EU
cuts direct subsidies to farmers, their search to open, but then
protect, new outlets will surely gain influence. 

There may be good news for them (and, for once, for EU buyers of their
products too). A firm from Spain, Abengoa, is the European leader in
ethanol, with 260,000 tonnes of capacity there, and 160,000 more on the
way. Big also in America, it hopes, using its experience there, to
build the EU's first maize-based plant, in south-west France. But it
may lead Europe in a far more significant direction than that. 

The biofuellers make much of their green credentials. Critics claim
their stuff takes more energy to make than it gives out; not so, say
allies, citing advances in technology. But neither greenery nor
energy-efficiency is the real issue. It is double-headed. First, can
they compete, unsubsidised, with mineral oil? Not yet in biodiesel,
says German experience. Nor in Europe's ethanol, says Abengoa's boss,
Javier Salgado: oil would have to reach $70 a barrel. But in America,
yes, at about $50 a barrel. So...

Second, can they compete with each other? The big transatlantic
difference is in raw material costs: about 30 euro-cents (39 American
ones) a litre in the EU, half that figure in America or Brazil, lament
the EU's ethanol-makers. The Brazilians gleefully agree. They expect to
make some 16 billion litres of ethanol this year, about as much as
America. And overall, they say, American ethanol costs 50% more to make
than theirs, European ethanol 150%; their stuff, they claim, became
competitive with petrol, at pre-tax prices, in 2002. By 2010 their
state oil company, Petrobras, hopes to be exporting 8 billion litres a

So, in a free-market world, only Brazil and the traditional oil
companies would be keeping transport moving? Not necessarily. Biofuel
technology is rapidly advancing. Even in Europe, Abengoa reckons its
ethanol could compete with mineral fuels within ten years. And a new
technology, aided by some biotech, may both cut costs and ease
raw-material constraints. Mr Salgado's firm, under an EU contract since
2003, has been studying how to make ethanol not from grain but straw.

It is not alone--nor indeed first. A Canadian firm, Iogen, backed with
capital not just from the government (which freed ethanol from federal
tax in 1992) and ex-state-owned Petro-Canada, but from Shell, opened a
pilot plant for such "cellulosic" ethanol a year ago. It now plans a
full-scale one in the Canadian prairies or Idaho. Another firm has
begun studying a plant, proposed for British Columbia, using wood.
America's Department of Energy heavily finances similar research, and
enthusiasts there say that within 20 years the result could cost only
80 cents a gallon, well below today's gasoline cost. And in a study,
"Growing Energy", put out last December, serious dreamers claim that by
2050 cellulosic biofuels, mainly ethanol from switchgrass, a native
American plant, could total nearly 120 billion gallons a year--over
two-thirds of today's total motor-fuel needs.

That is blue-sky stuff, and none of this is sure to happen: if the oil
price were to slump (or, as America's wind farms have shown, if
subsidies yo-yo), much may develop much more slowly or never. But the
old idea of biofuels as merely a green diversion from the real world
can no longer hold. Fine, when oil was $20 a barrel; not even oil
companies believe it now. 

See this article with graphics and related items at http://www.economist.com/printedition/displayStory.cfm?Story_ID=S%27%29%28H%2APQ%27%24%20P%23%2C%0A

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