Biofuels 2006, Production, Supply and Reality

HighQuest Partners LLC and its subsidiary Soyatech LLC have released a new report, Biofuels 2006: Production, Supply and Reality, which examines not only projected growth and prospects for biofuels production, but also the ramifications for the nation's agricultural and food industries

"There is no question that the dramatic increase in biofuels production projected over the next decade would force a major realignment of agricultural resources from food to fuel," said Jacob Golbitz, director of research for HighQuest Partners and study author.

The report projects U.S. biofuels production to grow to over 16 billion gallons per year by 2015. Ethanol will account for 14.2 billion gallons, increasing from 4.5 billion gallons in 2006, with the remaining 2.15 billion gallons in biodiesel. Ethanol will represent 9.4 percent of gasoline consumption, and biodiesel will equal approximately 4 percent of total estimated diesel consumption.

The vast majority of ethanol sold in the U.S. is E10, a mixture of 90 percent gasoline and 10 percent ethanol, which can be distributed through regular gasoline pumps and used in regular gasoline-fueled vehicles. The level of ethanol production forecast by this study is not dependent on a build-out of E85-capable pumps or widespread adoption of E-85 capable Flex-Fuel Vehicles.

The report states that forecast production levels will affect not only use of agricultural resources, but will also likely alter the dynamics of international trade in certain commodities. For example, corn used for ethanol fuel production will come out of stocks now allocated to exports and animal feeds. Since the U.S. supplies more than 60 percent of the international trade in corn, reallocation of this source to fuel will likely translate into higher prices for corn globally. Secondarily, corn is a major source of animal feed. Diverting corn toward ethanol production will potentially drive up the cost of meat and dairy products as well, and could result in lower livestock production.

At the same time, the increase in biodiesel production is expected to have a significant impact on importation of vegetable oils. The U.S. is currently a net importer of vegetable oil at approximately 4.8 billion pounds per year. The report projects that these imports will reach 20.5 billion pounds in 2015, an increase of more than three hundred percent.

Other key findings include:

• The biofuels capacity build out in the U.S. will occur rapidly as refiners race to secure feedstocks and bring production facilities on line.
• The future viability of biofuels production hinges largely on high petroleum prices, favorable government policies and incentives, and the availability and affordability of corn and other feedstocks. If any of these factors should become less favorable, biofuels production could be cut significantly.
• Large scale biofuel production in the U.S. will present a significant logistical challenge as already strained trucking and rail infrastructures will be the primary mode of transportation for biofuels and feedstocks.
• Although significant, the projected ramp-up of biofuels will not make the U.S. energy independent. Liberation of the global economy from dependence on Middle Eastern oil will require technologies other than fuels based on food and feed inputs. Cellulosic ethanol, made from agricultural wastes and low maintenance crops such as switchgrass, may be part of a larger scale solution if technological challenges in its production can be met.

Biofuels 2006: Production, Supply and Reality also provides an analysis of the profit potential for biofuels vis a vis the projected price of oil in the future, the impact on profit from the potential rise in feedstock prices, and the status and impact of new energy efficiency and renewable energy legislation and regulation. The study also includes a Biofuels Primer and analysis of biofuels production and usage in other parts of the world.