Ethanol and Biodiesel: Dropping Below the Production Cost of Fossil Fuels?

by Jim Lane (Biofuels Digest) ... As you can see from the hard data, the production cost for ethanol today is $1.22 per gallon, which translates to $51.24 per barrel. Now, on an energy basis — given that ethanol has 67% of the energy content of a barrel of oil, that translates to $76.86 on a barrel-of-oil-equivalent basis.

To make a fair comparison, we have to take into account the refining cost of making gasoline — we need to compare finished ethanol and finished gasoline, not compare corn to gasoline or ethanol to crude oil. Estimates of the variable cost of refining are not easy to obtain and vary based on the product mix, cost of utility power and so on, but tacking on at least $4 per barrel is fair (this older estimate from PSU puts it at $20). The EIA has this data from 2012, here.

$76 is well above today’s oil price, even if you tack on $4 for refining costs to make gasoline. But it’s not well above the price that oil is expected to reach by next year, according to the wizards at Raymond James (whose energy desk correctly forecast the collapse in oil prices, so we approach their forecasts with great respect, although timing is always an issue with any projection). They expect oil to reach around $70 per barrel by the end of 2017. Of course, we’ll wait to see what impact that might have on corn prices, the price for DDGs and for corn oil — but it would be a remarkable step in ethanol’s journey.

“The general perception is that biofuels are more expensive to produce than petroleum fuel products. That perception is not accurate for the net cost of production of ethanol in the US after considering the value of animal feed byproducts (DGrain and corn oil) and CO2 production for the human food market.”

Under the Renewable Fuel Standard, there’s an implied carbon credit for ethanol, and that’s in the value of the D6 RIN.

And that tells you that there’s a significant inflection point in ethanol and gasoline prices, and it’s this. If, one day, the production cost + the RIN cost of corn ethanol falls below any given source of conventional oils, it just makes economic sense for an obligated party to switch towards increased renewables production (as opposed to, say, investing in tight oil operations) — not because of obligations to government, but because of obligations to shareholders. That’s a step-change.

And it’s getting close. Thanks to the pricing data from our friends at PFL, we see that the D6 RIN is trading at 41 cents per gallon.

That adds $17.22 in carbon value to a barrel of ethanol. Putting the ethanol production price together with the RIN price, it makes sense to buy or make as much ethanol as you can stuff into the system — mandated or not — starting at $55 per barrel.

All the same math applies in the world of biodiesel, but there are different data points. So let’s look at those.

Starting again with CARD’s data on operating costs, the production cost of biodiesel right now is at $2.76 per gallon, or $115 per barrel.

It happens that CARD data is based on the soybean oil price of $0.31 cents per pound. Technologies that can use recycled oils that are sold as low as $0.22 per pound will have a production cost of roughly $2.61 per gallon. Now, biodiesel is much closer to petroleum on energy density — it’s between gasoline and diesel. So, depending on whether you want to compare biodiesel back to gasoline that comes out of a barrel of oil or to diesel, you’ll come up with a production cost range (on a barrel of oil equivalent basis) of $105-$115, after we’ve adjusted for energy density.

So, biodiesel is well above the $52 Brent crude oil price, right now. But biodiesel RINs are more valuable, and close the gap a little. According to PFL, D4 biomass-based diesel RINs are trading at $1.03 per gallon, and are adding $43.26 to the value of the barrel.

Putting the production price together with the RIN price, it makes sense to buy or make as much biodiesel as you can stuff into the system — mandated or not — starting at $62-$72 per barrel. That’s high compared to today’s price, but inside the predicted crude oil price of $70 that we referenced above.

But they are markets, and they are the markets we have. And don’t get me started on how free and transparent financial markets really are, Mr. Madoff. But they are the markets we have, and in the markets we really have, we can say that markets in California are telling us this:

You can make more money producing ethanol than producing gasoline from petroleum, according to our math. And investors might take note — because making money is generally what investors are trying to accomplish in the petroleum markets. READ MORE and MORE (OilPrice.com)