ENERGY OUTLOOK AND BIOFUELS SITUATION Dr. George Shumaker Center for Agribusiness and Economic Development
Crude oil prices increased dramatically from late 2004 through June of 2006 before easing downward into early 2007. Crude oil prices reached a peak of about $74 per barrel and retreated to under $60 per barrel in January 2007. Prices paid by consumers for gasoline, diesel fuel and heating oil followed the same track. Farm inputs made from petroleum also felt considerable upward pressure as well. Fertilizer and pesticide prices rose sharply but have also retraced some of the up move as crude oil prices fell. Historically, oil prices have recovered from upward spikes although the recovery time often takes a couple of years for the market to adjust. Expectations are for a continued slow easing of prices toward to $50 per barrel level. Figure 1. Petroleum Prices- Real and Nominal, US Energy Information Agency
Biodiesel Biodiesel is a fuel product produced from various vegetable oils and animal fats by the esterification and trans-esterification processes. It is produced by a reaction of
vegetable or animal fats with an alcohol along with a catalyst to create esters and glycerin. The mass of biodiesel is about 90 percent from the oil or fat and about 10 percent from the alcohol. Once produced it is commonly blended with petroleum diesel and used in all forms of diesel engines. Biodiesel has many advantages as a fuel supplement including increased lubricity especially with low sulfur diesel fuels, is a clean burning fuel that is also non-toxic and biodegradable and its use improves air quality. Interest in biodiesel production has surged over the last three years due to rising energy prices, government encouragement for alternative energy sources and a general interest in lessening dependence on foreign sources of oil. There are currently several small biodiesel producers and one medium sized operation in Georgia with several other ventures in various stages of development. Feedstocks currently being utilized include soybean oil, stabilized poultry fat and spent vegetable oils. Profit margins have been very tight during late 2006 and into early 2007 due to high prices for the oil feedstocks.
Estimated & Projectioned US Biodiesel Sales
Million Gallons
800 600 400 200 0
99
00
01
02
03
04
05
06
07
08
09
19
20
20
20
20
20
20
20
20
20
20
Market prices for biodiesel tend to follow the price of diesel fuel so with the declining retail fuel prices and higher input costs, biodiesel producers have seen profit margins
20
10
evaporate despite 51 cents per gallon Federal subsidy. Growth in production capacity may well slow until crude oil prices fall and there is an easing in feed stock prices. Ethanol Nationally, ethanol production has grown at a phenomenal rate over the last five years increasing from about 1.7 billion gallons to about 4.6 billion gallons at the end of 2006. The represents about 2.8 percent of the volume of gasoline used for transportation in the U.S. Current projections point toward continued rapid growth in production capacity, perhaps doubling within three years. The primary feedstock for ethanol production is corn. The technology to convert corn into ethanol is well known and has been practiced for centuries in various legal and illegal formats. However, the large modern ethanol plants are much more efficient than the stills used by our forefathers. About 17 percent of the 2006 U.S. corn crop will be used for ethanol production. This strong new demand for the crop has pushed corn prices well above the $3.00 per bushel level causing concern for livestock producers and feeders. There are currently no operating ethanol producers in Georgia however a group is planning on breaking ground soon on a 100 million gallon operation near Camilla. Despite the high corn prices, ethanol production is currently very profitable and expansion in the industry is expected to continue. Prospects for further expansion in Georgia may be limited by feedstock supply but if the Camilla group is successful, further plants may well follow. Georgia can be a profitable producer of ethanol under the current ethanol price situation. Concerns would arise with our competitive position relative to Midwest producers if ethanol prices were to fall since we must import the corn to produce the product.
Expectations are for continued profitability for ethanol producers even if crude oil prices ease downward. Net profits are very strong even with high corn prices at current oil prices, so there is no indication that expansion will not continue. The only concern is the fact that ethanol fuel is lower in energy than gasoline and therefore does not provide equal power or mileage. At some point, consumers may not be willing to purchase ethanol blends unless the price reflects the difference.
U.S. ETHANOL PRODUCTION (EST.)
5000 4500 4000 3500
Million Gallons
3000 2500 2000 1500 1000 500 0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
CORN USED FOR ETHANOL PRODUCTION
2500
2000
Million Bushels
1500
1000
500
0
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Biomass Conversion Many observers feel the best long term path to energy independence relies on converting various forms of biomass into useable energy products through either gasification of pyrolysis. Georgia possesses an abundance of biomass in the form of its largest forest land. Many agricultural products such as pecan and peanut hulls, corn stover, cotton stalks also can be converted into energy. Even some crops can be grown specifically for the purpose such as switch grass and certain tree species. Considerable effort is being expended to perfect the technology needed to convert this low valued products into high valued energy products. The potential payoff is great but the progress is slow and painstaking. The two biggest hurdles seem to be reducing the amount of energy required to operate the conversion process and the feedstock collection process. The currently envisioned feedstock products are bulky and widely dispersed, thus the collection, conditioning and transport costs are high relative to the value of the product. Ideas are to develop conversion processes that can be located near the feedstock source to reduce transport costs. Continued research is needed to fully develop the concepts.