Global Localization - The Model that Sustainably Commercializes Biodiesel

Biodiesel has had a tough 2009. By some estimates 70% of US production capacity has been permanently or temporarily idled and total production is estimated to decline 50% this year (http://tiny.cc/fATGJ). I just heard that a large, "well financed" equipment provider is about to declare bankruptcy. Distressed might be a euphemism.

Despite its current travails, I believe that the still-evolving biodiesel market will ultimately succeed, and it will do so by adopting a "globally localized" production model.

The current commercial production model attempts to maximize economies of scale with large, centralized production facilities that distribute their output nationwide and/or internationally in a type of hub and spoke model. Most large production facilities rely on farmed commodities and therefore implicitly incorporate commodity risk. This was particularly evident in the Summer of 2008, when diesel fuel spiked to $5.25 gallon in San Francisco, but soybean oil was trading at over $5.00/gal - before processing and distribution. Scale demands capital, and capital is traditionally shy of commodity risk.

There are, of course, multiple potential oilseed feedstocks, and increasingly commercial producers are investing to convert their facilities to "multi feedstock" so as to temper commodity pricing risks. In particular, one important feedstock is yellow grease. Traditionally this has been treated more as a nuisance by-product with some minimal amount of caloric value when mixed with animal feeds. Businesses traditionally paid to have it removed. However, as the biodiesel industry has discovered yellow grease as a viable feedstock, increased value has been ascribed to it, thereby investing it with an increasing level of commoditization. As was seen last year, when fuel prices spike, grease prices climb, and while the pricing delta between farmed oil seeds and grease may shrink, it is unlikely to completely disappear.

Multi-feedstock production is essential, but again, in a centralized production/distribution model (like the US and Europe), even grease is more easily commoditized and an efficient "grease market" created. As oil prices rise, crop prices rise and then if 30MM or 100MM gallon production facilities decide to switch over to processing yellow grease, grease itself will follow the petroleum pricing curve, reducing the comparative economic incentive for biodiesel production [absent government subsidy].

By localizing production - bringing small scale production to local communities that have a defined diesel consumption budget and access to a known quantity of feedstock, upfront capital is reduced dramatically, demand for the end-product is better known and monitored, changes in feedstock costs will be generally better understood and managed, and local employment opportunities will increase.

By its nature, biodiesel can only ever replace a small percentage of diesel fuel. In 2008, the US burned over 40 billion gallons of diesel in transportation (excluding off-road consumption), and we produced approximately 700MM gallons of biodiesel, a record level but only 1.8% of the total. While we can conceivably up our output, it will likely never exceed 10% of diesel usage. So, is 10% of $250 billion a good business? Is reducing the CO2 output from our national diesel fleet by 26 million tons (the equivalent of removing 6.8 million diesel cars from the roads) a good goal? Will it help our economy to train and employ 1000s of biodiesel savvy engineers and technicians? The answer to all of the above is [obviously] yes. However, the current production approach that tries to emulate the petroleum industry's economies of scale, is flawed and creates an impression that we cannot compete effectively with oil. I believe that the way to effectively implement a stable and profitable biodiesel production strategy is to "go local" both in the US and abroad.

By adopting a globally local strategy, we will ensure that biodiesel becomes a dependable alternative energy resource here and internationally, and will thereby provide an important piece of the local, national and global alternative energy portfolio.