Biodiesel backfire

April 26, 5:32 PMDallas Oil and Gas ExaminerAlisa Martin

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Homemade biodiesel: Lyle Rudensey holds a cup of refined
biodiesel that he made from used cooking oil in his garage last
week in Seattle. (AP Photo/Ted S. Warren)

When the government created an incentive to make biodiesel fuel competitive with petroleum diesel, markets responded. A $1-per-gallon tax credit to blend biofuel (based from vegetable or animal fat) with diesel was established in 2004.

According to the U.S. Departments of Agriculture and Commerce, over the next five years, U.S. production of biodiesel rose from less than 100 million gallons to more than 600 million gallons. Over the same period, industry made investments in infrastructure to raise production capacity from 250 million gallons in 2004 to more than 2.5 billion gallons in 2008.

The legislation, known as the Volumetric Ethanol Excise Tax Credit or "Blender Tax Credit," initially applied to all biodiesel produced or consumed anywhere. It then became profitable for exporters to "splash" just one gallon of conventional diesel into each 1,000 gallons of biodiesel before shipping -- or "dashing" -- tankers to foreign markets.

The "splash and dash" phenomenon led to growth in U.S. biodiesel exports from 5 million gallons in 2004 to 677 million gallons in 2008. U.S. biodiesel imports grew from 4 million gallons in 2004 to 315 million gallons during the same time.

Yet more legislation has reversed the outlook for the biodiesel market, and presented challenges to achieving the government's own requirements for its increasing use.

The "splash and dash" loophole was ended for exporters to the U.S. in the Emergency Economic Stabilization Act of 2008. However, U.S. blended biodiesel that is blended and then exported is still eligible for the tax credit.

But in an apparent tit for tat, in March 2009, the European Union imposed anti-dumping tariffs and anti-subsidy duties on imports of biodiesel from the U.S.

The Renewable Fuel Standard Program, established as part of The Energy Policy Act of 2005, requires that 0.5 billion gallons of biodiesel be blended into U.S.-consumed diesel fuel  this year, rising to 1 billion gallons in 2012. The EPA, however, has no regulatory mechanism for implementing this requirement, save for allowing this year's targeted numbers to rollover into a combined 2009/2010 target, a strategy that sounds a bit like hoping for the best.

Because of the serious challenges facing the U.S. biodiesel market this year, the EIA says it will more closely monitor biodiesel imports and exports, stocks, stock changes and consumption in its various reports.

For more info: See This Week in Petroleum by the EIA.