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Turning Soybeans Into Diesel Fuel Is Costing Us Billions (npr.org)
This year, trucks and other heavy-duty motors in America will burn some 3 billion gallons of diesel fuel that was made from soybean oil. They're doing it, though, not because it's cheaper or better, but because they're required to, by law. From a report: The law is the Renewable Fuel Standard, or RFS. For some, especially Midwestern farmers, it's the key to creating clean energy from American soil and sun. For others -- like many economists -- it's a wasteful misuse of resources. And the most wasteful part of the RFS, according to some, is biodiesel. It's different from ethanol, a fuel that's made from corn and mixed into gasoline, also as required by the RFS. In fact, gasoline companies probably would use ethanol even if there were no law requiring it, because ethanol is a useful fuel additive -- at least up to a point. That's not true of biodiesel. "This is an easy one, economically. Biodiesel is very expensive, relative to petroleum diesel," says Scott Irwin, an economist at the University of Illinois, who follows biofuel markets closely. He calculates that the extra cost for biodiesel comes to about $1.80 per gallon right now, meaning that the biofuel law is costing Americans about $5.4 billion a year.
Nearly all the farm subsidies stem from the Great Depression. The Dust Bowl led to food shortages. Today we pay farmers not to plant crops just to prevent their farmland from being sold and converted into condominiums. The idea is that if a similar ecological disaster strikes, we'll have plenty of reserve farmland which can rapidly be put back into production and sown with seeds.
Likewise, we pay farmers to overproduce. There's no way to know ahead of time what percentage of the crops will fail, so we set a target of growing enough crops that even if there's a worst-case crop failure (e.g. devastating cold snap in late Spring), there will still be enough crops to feed the entire country. Of course when no crop failure happens, we suddenly have more food than we need. Left to normal supply/demand economics, this would cause the price of these crops to crater, and farmers would go out of business. So instead the government sets a guaranteed price before the season. It buys all the crops thus ensuring the farmers stay in business. Then it sells that food to wholesalers and distributors at a loss. This is how corn, wheat, soybeans, etc. are subsidized.
That takes care of the economics (keeping the farmers from going bankrupt). But there's still a discrepancy between supply and demand. Because we overproduced, the government is left with a bunch of food which it can't sell. Rather than let it rot in silos, the government has to come up with other uses for it. A lot of it becomes food for foreign aid (which kills the economy for local farmers overseas, but that's another story). Some of the corn gets turned into high fructose corn syrup, to reduce our dependence on imported sugar cane (which only likes to grow in tropical climates).
And in the 1970s during the Arab Oil Embargo, some clever person said why don't we turn some of that extra food into fuel? You see, this is excess corn and soybeans we're talking about. The cost to grow the crop has already been paid - it's a sunk cost. Anything useful you can do with it is better than letting it rot in silos, as long as the added cost (i.e. excluding the cost of growing the crop) is less than the benefit of the use. For the biofuel program to make economic sense, only the cost of converting it into ethanol or biodiesel has to be less than the market price for gasoline or diesel. The feedstock (corn or soybeans) is essentially free.
That's how it began. Then the agriculture industry got a hold of the idea and lobbied for laws which mandated growing crops for the express purpose of converting them into biofuels. So now we're no longer talking about excess corn and soybeans. We're talking about corn and soybeans which were grown with the sole intent of turning them into ethanol and biodiesel. When you do that, suddenly the cost of growing the crop is no longer a sunk cost, and the economic cost of the program is the conversion cost plus the cost to grow the crop. And it becomes a money-wasting program. These programs need to be scaled back to what they originally were - a use for excess crops grown because of our food subsidies.
Like ethanol, biodiesel has its uses. Ethanol is hygroscopic (likes to absorb water). So adding a little ethanol to gasoline (but nowhere near the 10% we use) helps prevent water from building up in storage tanks. Likewise, the refining process which produces ultra low-sulfur diesel removes much of the natural lubricity in the fuel. Adding a small amount of biodiesel to the tank is a good way to get it back, helping reduce engine wear, reducing maintenance costs and improving engine lifespan. But the programs need to be scaled back to only use excess crops, with enough R&D on the process so they can be ramped up quickly if/when we hit peak oil.