Released on April 22, 2009
(Next Release on April 29, 2009)

Accounting for Biodiesel

Methyl Esters? No, it is not the name of the lead in a John Waters film, or of some gun-toting moll from 1940’s film noir. Methyl esters are more commonly known as biodiesel, a biomass-based fuel that is made from vegetable oils or animal fats. Biodiesel can be used in pure form (B100) or may be blended with petroleum diesel. Biodiesel and blends can be used in most modern diesel engines or burned as heating fuel.

The Renewable Fuel Standard (RFS) program, rising fuel prices over the last few years, and a $1 per gallon biodiesel tax credit led to a surge in biodiesel production capacity and production (Figure 1). However, the outlook for the U.S. biodiesel market this year remains highly uncertain. The European Union recently imposed new tariffs on biodiesel imports from the United States and rules for implementing the biodiesel blending requirements under the RFS have not yet been promulgated.

The recent trends in the biodiesel data reflect several legislative actions that significantly changed the biodiesel market. The Energy Policy Act of 2005 established the RFS program, (Environmental Protection Agency, Renewable Fuel Standard Program). The RFS program requires that 0.5 billion gallons of biodiesel be blended into domestically consumed diesel fuel in 2009, rising to 1.0 billion gallons in 2012.

Much of the increase in production in 2007 and 2008 was not consumed within the United States but was exported because of incentives provided by the biodiesel tax credit, specifically, the Volumetric Ethanol Excise Tax Credit or “Blender Tax Credit (BTC).” The BTC, first established in 2004 and extended in 2005, provides a $1.00-per-gallon tax credit for biodiesel that is blended with petroleum diesel. The intent of the BTC was to make biodiesel blends competitive with petroleum diesel, thereby increasing demand and spurring investment in biodiesel supply infrastructure.

The BTC initially applied to all biodiesel blended with conventional diesel regardless of where it was produced or consumed. This created a “loophole” that allowed imported biodiesel to benefit from the tax credit, which led to significant increases in biodiesel trade. Operators could exploit the loophole, called “splash and dash,” by adding a small amount of petroleum diesel fuel (“splashing”) to an imported tanker load of B100. Adding just 1 gallon of conventional diesel to 1,000 gallons of biodiesel was enough to qualify for the BTC. The shipment was often then exported (“dashed”) to foreign markets.

As a result, increasingly large volumes of imported biodiesel from Asia and Latin America took advantage of the loophole. U.S. biodiesel imports grew from 4 million gallons in 2004 to 315 million gallons in 2008. U.S. biodiesel exports grew from 5 million to 677 million gallons over this same period, with most of the exports going to member countries of the European Union (EU).

The Emergency Economic Stabilization Act of 2008 (EESA) included several biodiesel-related provisions. The EESA extended the BTC through December 31, 2009, but closed the “splash and dash” loophole. Foreign-produced biodiesel sent to the United States no longer receives the BTC, but domestic biodiesel that is blended and then exported is still eligible.

Domestically produced biodiesel may also face declining export opportunities. In March 2009, the EU imposed anti-dumping and anti-subsidy duties on imports of biodiesel from the United States. Starting on March 13, for the next six months, U.S. firms exporting biodiesel into the EU will have to pay anti-dumping tariffs of up to 29 percent and anti-subsidy duties ranging between 29 percent and 41 percent.

The current regulatory structure does not provide a mechanism for implementing the RFS requirement for use of 0.5 billion gallons of biomass-based diesel in 2009. The primary approach that EPA has identified is to increase the 2010 biomass-based diesel requirement by 0.5 billion gallons and allow 2009 biodiesel and renewable diesel RINs (renewable fuel identification numbers) to be used to meet this combined 2009/2010 requirement.

Because of the serious challenges facing the U.S. biodiesel market this year, the Energy Information Administration (EIA) has expanded its reports of biodiesel trade. We revised historical biodiesel data in our March 2009 edition of the Monthly Energy Review (MER) to account for imports and exports; specifically, we expanded Table 10.4 to report biodiesel imports, exports, stocks, stock change, and consumption. We made similar revisions in the April 2009 edition of the Short-Term Energy Outlook, and we expanded the Petroleum Supply Monthly to include blending data on biomass-based diesel.

Gasoline Price Creeps Up Again
The national average price for regular gasoline continued to move higher, increasing almost a penny to $2.06 per gallon. That price was $1.45 less than the price a year ago. On the East Coast, the price rose 1.4 cents to $2.04 per gallon. The average price in the Midwest was essentially unchanged at $2.01 per gallon. For the third week in a row, the average price on the Gulf Coast was the lowest of any region as it grew a half cent to $1.97 per gallon. For the second consecutive week, the largest increase occurred in the Rocky Mountains, where the price rose by more than 4 cents to $2.05 per gallon. On the West Coast, the price crept up less than half a cent to $2.28 per gallon. In California, the average price was $2.34 per gallon.

At the national level, the price of diesel fuel inched lower by nearly a cent to $2.22 per gallon, $1.92 below the price a year ago. With the exception of the Rocky Mountain region, prices slipped somewhat across the Nation. Dropping about a penny each, the price on the East Coast was $2.26 per gallon, while the Midwest price was $2.17 per gallon. The average for the Gulf Coast dipped approximately two cents to $2.19 per gallon. The price in the Rocky Mountains increased more than 2 cents to $2.27 per gallon. Prices on the West Coast and in California dropped about a penny each to $2.33 and $2.34 per gallon, respectively.

Propane Inventories Continue Early Season Build
Primary inventories of propane continued their early season build last week, posting a 0.6 million barrel gain that put the inventories at an estimated 41.4 million barrels as of April 17, 2009. Except in the East Coast, where inventories lost a modest 0.2 million barrels, inventory gains were reported in the Midwest with 0.4 million barrels and the Gulf Coast with 0.3 million barrels. The combined Rocky Mountain/West Coast region remained unchanged last week. Propylene non-fuel use inventories moved lower by 0.2 million barrels and accounted for a 6.3 percent share of total propane/propylene inventories compared with the prior week’s 7.0 percent share.

Text from the previous editions of “This Week In Petroleum” is now accessible through a link at the top right-hand corner of this page.