Gasoline Prices, Biofuels and the Critical Years 2013-2015

It’s really unfortunate that the mainstream media is not taking a serious look (or any look for that matter) at the development of a wide range of biofuels. The feedstock for these technologies goes way beyond corn, soybeans, rapeseed, and sugar cane. None of them rely on food-based crops. Many can use municipal, agricultural, and forest waste, as well as specifically developed feedstocks that can be grown on marginal land with minimal use of fertilizers or water beyond normal rainfall.

Here’s a partial list:
Perennial grasses like switchgrass, giant miscanthus, prairie grasses. Seed oil like camelina, jatropha, and palm. Woody plants like hybrid poplar, mesquite, willow, agave, forest and lumber mill waste. Agricultural residue like corn stover, sugar cane bagasse, and wheat straw.  Algal oil. Waste cooking grease, inedible beef and porcine fat, poultry fat, prepared food waste.

The exciting news is that all of these technologies have gone beyond the lab. Recall that there are four stages of product development.

The first phase is the research in the laboratory where new concepts are proposed and then tested to the point that they seem viable. Cost is not a consideration at this point.

The second phase is the pilot plant that takes the work in the lab through a process on a relatively small scale to test what is known as “proof of concept”. It’s at this point that decisions have to be made about basic engineering and whether the necessary equipment can come off the shelf, or if proprietary equipment needs to be developed. The pilot plant is actually producing the biofuel, although in relatively small amounts. However, sufficient fuel is produced to be able to make further tests to see what, if anything, needs to be done to make the fuel usable to existing processes or vehicles. Again, cost per unit will be high.

The third phase is the demonstration facility. This represents a significant increase in both investment and production. At this phase the engineering bugs are worked out and the process is optimized. It is at this point that cost considerations become front and center – not only the capital costs of production at commercial scale, but also the cost and reliable acquisition of the feedstock over the long term.

Each phase requires a greater infusion of cash, both for capital expenditures and professional staff.

Many companies don’t go beyond the demonstration phase. Significantly more investment – in the tens of millions – will be required to go to the next phase, and the potential investors may not want to take the risk.

The final phase is the commercial facility where production is at scale and is economically feasible. Usually the company will be burning through cash as the capital investments are made in the early years, but then become profitable in subsequent years. It is at this phase that economies of scale (the sheer size of the facility) bring the costs of the process down to the point of being competitive.

Where are we now? Somewhere between phase two and phase four, depending upon the particular process. By the end of this year and looking ahead to 2013, 2014, 2015 there will be more projects moving to demonstration and full commercial facilities.

It seems to be a little know fact that the U.S. now produces over 900,000 barrels of ethanol a day and that the ethanol blend – even though most is just B10 – has dropped the wholesale price of gasoline by 89-cents. The move to B-15 – that can be used in most cars built from 2001 – will enter the gasoline stream in the latter half of this year. Drop in fuels – those that can be used directly in a vehicle – are also entering the market this year.

We are in the middle of a biofuel revolution where American ingenuity and inventiveness have never been more prominent. – jack star