Transcript The Biodiesel Industry and U.S. Agriculture.

Biodiesel
Kenneth R. Szulczyk
December 8, 2005
Biodiesel
• Presentation
• Half is technological knowledge
– Determine how markets are connected
• Half is economic analysis
– Supply/demand analysis of 7 markets
Contents
• Biodiesel benefits
• Differences between diesel and biodiesel
• Production
– Biodiesel
– Petroleum
• Analysis
• Conclusion
• Future research
Biodiesel Benefits
• Biodiesel offsets greenhouse gas
emissions by recycling carbon through
photosynthesis [13 and 15].
– Plants remove carbon from the atmosphere
by photosynthesis
– Carbon is stored in plants as oils, sugars, and
cellulose.
– Plants are processed into fuel
– Carbon is released back into the atmosphere
as automotive emissions.
Biodiesel Benefits
• A biodiesel industry could increase prices
and income for the agricultural sector [13,
15, and 17].
Biodiesel Benefits
• A biodiesel industry contributes to energy
security and less reliance on Middle East [13, 7,
9, and 15].
– Gulf states control approximately 2/3 of the world’s oil
reserves [12]
– Biodiesel industry could help protect the U.S. from
crude oil price volatility and OPEC’s cartel pricing [14]
– The U.S. could decrease its military presence in the
Gulf States [12]
– Help leverage limited supplies of petroleum [15]
Biodiesel benefits
• Biodiesel reduces harmful emissions
– Biodiesel contains no sulfur or mercury
• Sulfur and mercury emissions are decreased when
biodiesel is mixed with diesel [5, 10, and 13]
– Pure biodiesel contains up to 10-12 % weight
of oxygen [5 and 10]
– Diesel fuel contains almost zero oxygen [10]
Biodiesel Benefits
• Oxygen allows more complete combustion
– The following emissions are reduced
• Hydrocarbons (HC) [15]
• Carbon monoxide (CO) [10, 15, and 17]
• Particulate matter (PM) [10, 15, and 17]
– However the higher oxygen content increases
NOX emissions for most diesel engine types
[5, 10, 15, and 17]
• The engine timing can be adjusted to reduce NOX,
but it always causes higher particulate emissions
[10]
Differences between biodiesel and
diesel
• Differences could cause prices not to be
the same
• Diesel and biodiesel have many chemical
properties
• Discuss major differences
– List negative first then positive
Differences between biodiesel and
diesel
• No 2 diesel contains 131,295 BTU per
gallon [10]
• Pure biodiesel contains approximately
10% less energy [10]
– Lower energy content results in lower MPG
– Adds up over large distances
Differences between biodiesel and
diesel
• All biodiesel fuels have worse cold fuel
properties than number 2 diesel [7 and 10]
– Properties are cloud point and pour point.
• Cloud point is the temperature that causes the fuel to form
wax on the fuel filter, thus clogging it [7 and 10]
• Pour point is the temperature the fuel turns into a gel and can
no longer flow [7 and 10]
– The cloud point and pour point for biodiesel fuels tend
to be 20 -250 C higher than number 2 diesel [7 and
10]
– If the biofuel is produced from saturated oils like
tallow, then the cold flow properties are worse [10]
Differences between biodiesel and
diesel
• Biodiesel contains oxygen that leads to
fuel oxidation.
– Forms insoluble gums [10]
• Pure soy biodiesel has a higher flash point
than number 2 diesel.
– Flash point is the minimum temperature the
fuel must be heated to ignite the vapor and air
[7 and 10]
– Pure soydiesel with no impurities has a flash
point over 1000 C while diesel is 71 [7 and 10]
Differences between biodiesel and
diesel
– The U.S. Department of Transportation
considers a flash point higher than 900 C as
nonhazardous [10]
– Soydiesel is safer than regular diesel
• Pure biodiesel has better lubrication
properties.
– The fuel pump and fuel injectors get better
lubrication, which could extend engine life [10]
Production - Biodiesel
• Soybeans
– Seeds contain 17-19% oil [7 and 5]
– Seeds contain high quality protein for animal feed
[7]
– Matured field contains 400 lbs of oil per acre [7]
Production - Biodiesel
• Corn
– Kernels have up to 20% oil [11]
– Kernels contain high quality protein for animal feed [7]
– Matured field contains approximately 200 lbs of oil per
acre [7]
– Lower oil content could be offset by starches and
sugars
• High fructose corn syrup (HFCS)
– Sugar substitute
• Could be fermented into ethanol
– Ethanol could offset gasoline
– Could be used in biodiesel production
Production - Biodiesel
• Trivia
• Which plant ???
– Seeds contain twice as much oil as soybeans
– Yields more than 3 times more oil per acre
than soybeans
– Contains nutrients like omega-3 oils, zinc,
beta carotene, etc.
Production - Biodiesel
• Chemical formulas uses mass measure, like grams
and kilograms
• People and petroleum industry uses a volume
measure
– Gallon, Barrel
– 1 Barrel = 42 gallons
• Use density to change between mass and volume
– Volume changes with temperature
– Change signs into
• Trivia

– Which substance is less dense as a solid than as a liquid?
Production - Biodiesel
• Chemical reaction
• Oil is decomposed into glycerol and an
ester [8, 9 and 10]
– Ester is biodiesel
– Calculate input-output coefficients from
chemical formula
1oil (triglyceride)  3 m ethanol 3 m ethylester  1 glycerol
1,000kg
107.5 kg
1,004.5 kg
103kg
Production - Biodiesel
• Three methods to produce biodiesel
– Trans-esterification of oil with a catalyst
– Supercritical methanol trans-esterification
– Enzymatic trans-esterification by lipase
• Could use different alcohols
– Methanol
• Cheaply made from natural gas and water
• Methyl-ester
– Ethanol
• Fermented corn sugars and starches
• Ethyl-ester
Production - Biodiesel
• Used chemical formula to derive input-output
coefficients for soybean oil
–
–
–
–
Densities of substances
Liter to gallon conversion
Example is for soybean oil
Coefficient is similar for corn oil
1 gal. ester  0.9641gal. oil
1 gal. ester
3.7854L 0.885Kg 1000Kg oil
1L
1 gal.




 0.9641galoil
1 gal.
L
1004.5Kg ester 0.9138Kg 3.7854L
Production - Biodiesel
• Biodiesel could be substituted for diesel or
blended with diesel
• Biodiesel concentration is always written as BXX
– XX refers to the percentage of biodiesel
– B20 is composed of 20% of biodiesel and 80%
regular diesel.
• Each gallon of biodiesel offsets one gallon of
diesel
• How does biodiesel impact diesel fuel
production and petroleum industry?
Production-Petroleum
• Petroleum is a complex substance and is
composed of many compounds
– Spans from methane (CH4) to complex hydrocarbons
like C85H60 [12, p.4]
– Fractional distillation - each substance has a different
boiling temperature that allows the components of
crude oil to be separated [12, pp.6-8]
– Chemicals
• Gasoline
• Diesel fuel
• Jet fuel, asphalt, chemicals to manufacture plastics, and
hydrocarbon gases
Production-Petroleum
Leffler p. 23
Production-Petroleum
• “Fluff up the barrel”
• The output chemical has higher volumes
than the input chemicals [12, p. 45]
• Diesel fuel has a higher density than
gasoline.
– 1 gallon of diesel fuel could be converted to
more than 1 gallon of gasoline [12, p. 28]
Production-Petroleum
• Diesel contains cetane (C16H34) and can
be “cracked” into octane (C8H18), hexene
(C6H12) and ethylene (C2H4) [12, p.27]
– Octane and hexene could both be mixed into
gasoline
– 1 gallon of cetane yields 1.09 gallons of
octane and hexene.
C16 H 34
258kg

heat  catalyst
C8 H 18  C 6 H 12  C 2 H 4
130kg
96 kg
32kg
Production-Petroleum
• Exact conversion of diesel to gasoline is
unknown, because both are complex
substances
• Both are mixed to have desirable
properties
• Gasoline
– Boils between 90 and 2200 F [12, p.6]
– Contains hydrocarbons that range in length
from C4 to C12 [16, p. 15]
Production-Petroleum
• Gasoline
• Two most important properties are octane rating and vapor
pressure.
• Trivia
• What is octane rating (MON and RON)?
• Octane is a measure of how much pressure and temperature is
needed to ignite the fuel/air mixture.
• Higher octane gasoline is preferred, because premature fuel ignition
in the engine causes a ping sound, which places stress on engine
parts and in some cases could damage the engine.
• Different substances have different octane ratings, so gasoline is
mixed with a minimum octane rating [12, pp. 90-95]
Production-Petroleum
• Vapor pressure
– When the car engine is cold, some of the fuel has to vaporize
easily, so the fuel can be mixed with air and combusted in the
engine.
– Once the engine is warm, the other components of the fuel will
easily vaporize.
– Butane, C4H10, is used, because it easily dissolves in gasoline,
has a low boiling point, and easily vaporizes.
– When you are filling your gas tank, the vapors you see escaping
is butane.
– More butane is mixed in the gasoline in the winter time than
summer
– Helps start the car engine in colder temperatures. Thus, the
composition of gasoline changes with the seasons and climate
[12, pp. 86-89]
Production-Petroleum
•
•
•
•
•
Diesel fuel is denser
Diesel has a boiling point ranging between 450 and 8000 F [12, p.6]
Contains hydrocarbons that range from C15 to C25 [16, p. 15]
Most important property is cetane number.
The cetane number is similar to octane rating, because pressure
and heat is needed to ignite the fuel/air mixture.
• Diesel engines do not have spark plugs, so pressure and heat is
needed to ignite the diesel fuel,
– Give diesel engines their characteristic rattling sound.
• Diesel fuels have cetane number between 40 and 45 and higher
quality fuels have higher cetane numbers [12, pp.104-106]
– Biodiesel has comparable cetane number
Analysis
• In 2002 the U.S.
DC  g1D PC ,
g1D
0
PC
– Produced 8,966.8 million bushels of
corn [1].
S
– Exported 41,177,000 metric tons [1].

g
S
1
0
– Corn comes in a variety of grades, so S C  g1 PC ,
PP
the market price is not given.
– The supply function for corn is vertical,
ESC  SC  DC
indicating a fixed quantity is produced
each year
– Demand is determined by firms that
use corn to produce corn oil, protein
meal, and high fructose corn syrup.
– The U.S. is a large country exporter,
indicated by the excess supply function
in the international market.
Analysis
• In 2002, the U.S.
DCO  g
D
2
PCO ,
g 2D
0
PCO
– Produced 323.3 million gallons of corn
oil [2].
g 2S
g 2S
S
– Imported 8.6 million gallons [2].
SCO  g 2 PCO , PC 
 0,
0
PCO
PC
– Exported 117.3 million gallons [2].
– The corn oil price was 27.25 cents per
pound or $2.068 per gallon [2]
ESCO  SCO  DCO
• Demand for corn oil is determined by
food and biodiesel industries
• Supply is vertical, indicating a fixed oil
supply is pressed from a fixed soybean
supply
• The U.S. is a net exporter, indicated by
excess supply function
Analysis
• In 2002, the U.S.
– Produced 2,756.1 million bushels of
soybeans [1].
– Exported 28,441,330 metric tons [1].
– Market price for soybeans is $5.53 per
bushel [1].
– The soybean supply function is vertical,
indicating a fixed quantity of soybeans
are provided each year
– The demand function is determined by
firms that extract the oil and use the
protein meal.
– The U.S. is a large exporter, indicated
by an excess supply function in the
international market.
S S  g 3S PS ,
g 3S
0
PS
DS  g PC ,
g3D
0
PS
D
3
ESS  SS  DS
Analysis
g 4D
• In 2002 the U.S.
D
DSO  g 4 PSO ,
0

P
– Produced 296.4 million gallons of
SO
soybean oil [1].
g 4S
g 4S
S
 0,
0
– Exported 42.3 million gallons [1]. S SO  g 4 PSO , PS 
PSO
PS
– Soybean oil price was 22.04 cents
per pound or $1.68 per gallon [1].
ESSO  SSO  DSO
• The supply function is vertical,
indicating a fixed quantity of oil is
extracted from a fixed supply of
soybeans
• The demand function is determined by
the food and biodiesel industries.
• The U.S. exports soybean oil and is
represented by an excess supply
function.
Analysis
• Petroleum market
– In 2004 the United States
•
•
•
•
Refineries processed 237,943 million gallons [3]
Imported 154,310 million gallons [3]
Exported 411 million gallons [3]
Average petroleum price was $36.77 per barrel or $0.88 per
gallon [3].
Analysis
• The demand function is determined by the
refineries,
– Convert petroleum into a host of chemicals
with the largest two being diesel and
gasoline.
– As the petroleum price increases, then
refineries quantity demanded decreases
– Higher diesel and gasoline prices cause a
higher demand for petroleum.
– The supply function is upward sloping,
because the firms can extract more
petroleum as the market price increases.
– The United States is a large importer of
petroleum, which is represented by an
excess demand function in the international
market.
DP  f1D PP , PD , PG , 
f1D
f1D
f1D
 0,
 0,
0
PP
PD
PG
SP  f
S
1
PP ,
f1S
0
PP
EDP  DP  S P
Analysis
• Diesel and gasoline markets.
– During 2004, the U.S.
– Refineries produced 58,700 million gallons of diesel
fuel, and 126,561 million gallons of gasoline [3].
– Imported 4,922 million gallons of diesel and 6,785
million gallons of gasoline [3]
– Exported 1,684 million gallons of diesel, and 1,911
million gallons of gasoline [3]
– The retail price for regular unleaded gasoline was
$1.88 per gallon and for diesel was $1.81 per gallon
[3].
Analysis
DD  f
•
•
•
Consumers determine the demand for both markets.
– Consumers with cars use gasoline while drivers
of diesel powered vehicles demand diesel.
– Supply function is upward sloping for both
markets, because refineries can adjust the
quantity supplied in each market.
Diesel and gasoline markets are related
– Refinery can change production to produce the
more valuable commodity.
• If diesel prices are relative high and gasoline
prices are low, then the refineries maximize
their production of diesel fuel.
• If diesel prices are low and gasoline prices
are high, then the refineries can convert
some of the diesel into gasoline.
The United States is a net importer of diesel and
gasoline, and they are represented by excess
demand functions in the international markets.
D
2
PD ,
f 2D
0
PD
S D  f 2S PP , PD , PG , 
f 2S
f 2S
f 2S
 0,
 0,
0
PP
PD
PG
EDD  DD  S D
DG  f
D
3
PG ,
f 3D
0
PG
S G  f 3S PP , PD , PG , 
f 3S
f 3S
f 3S
 0,
 0,
0
PP
PD
PG
EDG  DG  SG
Analysis
• The analysis starts with the creation of the biodiesel
industry.
• If all the soybean oil were converted to biodiesel, then
soy diesel would comprise less than 1% of the market.
• Could a firm supply biodiesel with no government
assistance?
• Refer to the Table 1
• The biodiesel firm has an annual production capacity of
30 million gallons
• Based on the prices and assumptions, the firm has to
sell the biodiesel for $1.81 per gallon to breakeven.
• At this price, the firm could supply biodiesel with no
government assistance.
– Assuming industry is small and does not cause prices
to increase
Analysis
30 million gallon per year plant
Capital
$21 million finance over 10 years at 8%
Annual amount
Unit price
12 employees
107.4 tons
100 kw
90,000 gallons
$20 /hr
50% of labor
$400 per ton
$0.07 per kwh
$5 / Mgal
2% of Capital
3.5% of Capital
-499,200.00
-249,600.00
-42,960.00
-168,000.00
-450,000.00
420,000.00
-735,000.00
-1,724,760.00
30,000,000
3,590,723
2,158,407
28,924,338
$1.81
$0.95
$1.09
$1.67
54,275,308.77
-3,411,186.69
2,358,422.09
-48,368,164.91
0.00
0.00
Capital depreciation
Labor (2,080 hours)
Overhead
Caustic (sodium hydroxide)
Electricity (24,000 hrs)
Water
Local taxes and insurance
Maintenance
Operating expenses
Biodiesel (gallons)
Methanol (gallons)
Glycerine revenue (gallons)
Feedstock oil cost (gallons)
Gross income
Income tax
Net income
35% of gross income
Annual payment
-3,129,619.26
0.00
Analysis
• Refer to handout
• The biodiesel firm buys soybean oil to
produce biodiesel
• Demand increases
– Soybean oil is cheaper than corn oil.
– Both the soybean oil market price and
domestic soybean oil supply increases while
exports of soybean oil decrease.
Analysis
– Firms that produce soybean oil will demand
more soybeans, because of higher price
• Soybean market price increases
• More soybeans are supplied domestically
• Less soybeans are exported.
– As more soybeans are used domestically, the
supply of soybean oil increases, causing the
soybean market price to decrease.
– The market price for soybean oil falls, but
most likely not at their original levels.
Analysis
Analysis
• The impact on the corn oil market is ambiguous
without empirical data
– Depends on the soybean oil price increase.
– After the creation of the biodiesel industry, if the
soybean oil price remains below the corn oil price,
then the biodiesel industry has no impact on the corn
oil industry.
– If the soybean oil market price exceeds the corn oil
price, then biodiesel firms will substitute corn oil for
soybean oil.
– Currently, the spread between the two prices is
approximately $0.40 per gallon, but a large biodiesel
industry could cause this spread to disappear.
Analysis
• Let’s assume the soybean oil price
becomes high enough that firms use both
corn and soybean oils.
• The effects are similar for the corn market.
• Less corn and corn oil are exported, the
market prices for both increase, and the
domestic supplies for both increase.
Analysis
Analysis
• A biodiesel industry increases the supply of diesel fuel, because
biodiesel can be blended with regular diesel.
– The market price for diesel falls and less diesel is imported.
– Refineries see a lower market price for diesel and convert more
diesel into gasoline, causing the gasoline supply to increase.
– The gasoline price and imports both fall.
– The refineries demand less petroleum, causing the petroleum
price and petroleum imports to both fall.
• The lower supply of petroleum causes the supplies for both gasoline
and diesel fuels to decrease, and increases the market prices for
both goods.
– Most likely, the market prices will not increase to the original
level.
• Therefore, a biodiesel industry could cause the United States to
import less petroleum.
– All petro-chemicals need substitutes, like jet fuel, plastics, asphalt, etc.
Analysis
Conclusion
• Iif all corn and soybean oils were converted into biodiesel, these oils
would supply approximately 1% of the diesel market.
– A large biodiesel industry would have a negligible impact on petroleum
imports.
– The U.S. agricultural industry would have to greatly expand corn and
soybean production in order to supply a significant share of the diesel
fuel.
• Corn and soybean oils are used by the food industry, and a large
biodiesel industry could cause foods that use these oils to become
more expensive.
• Finally, vegetable oils are perfect substitutes in the biodiesel
production and therefore the market prices for these oils will
converge.
– If one vegetable oil is cheaper than the others, then as the biodiesel
industry buys the cheaper oil. The higher demand causes the market
vegetable oil price to increase until it converges with the other vegetable
oil prices.
Future Research
• Incorporate topic as a dissertation
• Build time-series simultaneous equation model
– Supply and demand
– Diesel, Gasoline, and Petroleum markets
• Petroleum market has a Hamiltonian
• Use equations in SOYMOD for ag sector
• Input all equations into GAMS and solve
• Determine
– Market penetration
– International flows
– How petroleum import changes
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2.
3.
4.
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