Production Processes and Industry Structure

The U.S. biodiesel refinery industry is composed of a few large production plants and many small plants and appears to be less concentrated overall than the related ethanol or biotechnology industries (Koplow 2006), though plant sizes have been increasing (Kenkel and Holcomb 2006). In contrast to second or third generation biofuels, biodiesel production is already commercially viable (with the backing of U.S. fuel efficiency tax incentives and agricultural sector subsidies to keep down feedstock prices), so there is comparably less need for continued R&D. In this sense, it seems likely that there will only be further non-drastic innovations in the biodiesel industry (e.g. improving refinery processes or chemical additives), as long as the same crops are being used as an oil base. This lack of need for major R&D funding suggests that the optimum industry structure for biodiesel based on first generation feedstocks is one that is strongly competitive, promoting routinized but continuing non-drastic innovation, while Schumpeterian monopoly could be beneficial for emerging potential biodiesel sources, such as algae, which still require substantial research and development before they will become commercially marketable, but which could offer major increases in fuel productivity per unit of land area. The relatively large number of patents in the biodiesel industry and relative lack of concentration of ownership of these patents (Glenna and Cahoy 2009) both further support the idea of routinized innovation being common in this industry and suggests a relatively high degree of appropriability of rewards for innovation in this sector, which could be used to justify an argument that biodiesel is not an industry which requires U.S. government subsidization for R&D purposes (see Gelabert, Fosfuri, and Tribó 2009).

 Source: Kamis and Joshi (2008)

A significant opportunity exists, which could have positive effects for U.S. farmers, for economies of scope and vertical integration in biodiesel production. In some cases, farmer cooperatives have combined resources to own and run small biodiesel production plants, thereby involving farmers in more stages of value-added in the biodiesel commodity chain. A large number of small competing biodiesel cooperatives seems likely to encourage non-drastic innovation. Furthermore, economies of scope in which crop producers also refine biodiesel allow for the overall profitability of biodiesel to fluctuate less as a result of changes in crop prices, since the increases in crop prices, while increasing biodiesel input costs, would accrue to the same farmers who own the biodiesel production plants (unless agriculture input prices have also risen). Of course, this could result in biodiesel production becoming less responsive to crop prices, which could have negative implications for food vs. fuel issues.

Another aspect which distinguishes biodiesel from ethanol or second generation biofuels is the fact that relatively unrefined but usable fuel can be produced with very low overhead capital costs. Embracing a DIY ethic surprisingly analogous to that of the open source software movement, hundreds of homebrewers began manufacturing biodiesel for personal use as early as the 1980s, some time before larger-scale commercial production expanded significantly. By word-of-mouth and, in more recent years, through on-line information-sharing, biodiesel homebrewers have been exchanging recipes and ideas for production methods for the past few decades. While biodiesel homebrewing will not revolutionize fuel production on a large scale, it has offered a cheaper and more environmentally friendly alternative to purchasing petrodiesel for numerous people around the world. With a little extra work, biodiesel can be made from recycled cooking oils as well, allowing for the re-use of waste products. For some modified diesel engines, running on straight vegetable oil can also be an option, though a less tested one which does not perform well in cold weather. By using recycled waste vegetable oil, homebrewers can produce biodiesel at a marginal cost of a mere 50 cents to one dollar per gallon (not counting the opportunity cost of devoting some labor to the processing), while building a decent processing system can be accomplished for around $100. Straight vegetable oil processing systems, by contrast, can cost upwards of $500 to $1200, but can offer long-run cost advantages.

Here is a video demonstrating a fairly basic process for making a small batch of biodiesel from vegetable oil:

For a much more detailed guide, see here.

Works Cited

Gelabert, Liliana; Fosfuri, Andrea; and Josep A. Tribó. (2009). “Does the Effect of Public Support for R&D Depend on the Degree of Appropriability?” The Journal of Industrial Economics 57,4: 736-767.

Glenna, Leland L. and Daniel R. Cahoy. (2009). “Agribusiness concentration, intellectual property, and the prospects for rural economic benefits from the emerging biofuel economy.” Southern Rural Sociology 24,2: 111-129.

Kamis, Ronald and Mandar Joshi. (2008). “Biofuel Patents Are Booming.” Baker & Daniels.

Kenkel, Phil and Rodney B. Holcomb. (2006). “Challenges to Producer Ownership of Ethanol and Biodiesel Production Facilities.” Journal of Agricultural and Applied Economics 38,2: 369-375

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