U.S. Biodiesel Subsidies Anger Europeans

The price of the raw material the U.S. biodiesel industry uses most, soy oil, has shot up, all but pricing the alternative fuel out of the U.S. market. A hefty tax credit and a big leap in exports to Europe are keeping the industry afloat, angering Europeans, who accuse Americans of flooding their market with artificially cheap fuel.

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The U.S. biodiesel industry is in a jam. The cost of the raw material it uses most — soy oil — has shot up even faster than crude oil, and that's nearly priced the alternative fuel out of the U.S. market. Only a hefty tax credit and a leap in exports to Europe are keeping the industry afloat. But that's angered many Europeans who accuse the U.S. of flooding their market with artificially cheap imports.

Frank Morris of member station KCUR in Kansas City reports.

FRANK MORRIS: Big trucks loaded with soy are pulling into the Prairie Pride biodiesel plant on the green plains outside tiny Eve, Missouri.

Gilbert Wilson bangs the side of his truck to dislodge every last little yellow bean.

(Soundbite of truck unloading beans)

MORRIS: Wilson's soy is worth about twice what it was last year.

Mr. GILBERT WILSON: Well, yes, it's a great price. This Prairie Pride situation here is going to be a big help for this area.

MORRIS: A couple of years ago, Wilson and more than a thousand other farmers chipped in to build this $100-million plant. Farm commodities were a lot cheaper then and diesel was fairly high.

National Biodiesel Board's CEO Joe Jobe says a rush of sorts ensued.

Mr. JOE JOBE (CEO, National Biodiesel Board): You could pencil it out on a bar napkin and you could produce biodiesel and sell it at a discounted diesel fuel. And that stimulated a huge amount of investment and installed production capacity.

MORRIS: But as production facilities mushroomed, so did the price of soy. Now the industry is running at less than a quarter of its capacity. At least 20 plants have shut down; brand-new facilities sit empty and unused.

Inside the new ranch-house style office building at Prairie Pride, marketing director Kent Engelbrecht keeps a quote from the German philosopher Friedrich Nietzsche scrolled on his white board.

Mr. KENT ENGELBRECHT (Commodity Manager, Prairie Pride, Inc.): That which doesn't kill us makes us stronger. And it's certainly become evident and worth getting stronger one way or another.

MORRIS: For now, the only way to stay in business is to export fuel. All two dozen black tank cars lined up on the railroad track at Prairie Pride are bound for the Port of Houston. There, an oil company will add a little bit of petroleum diesel and pick up a $1-per-gallon federal blending subsidy. Then it's off to Europe. Mandates and tax breaks there ensure demand.

Prairie Pride General Manager John Nelson says the domestic industry dies without the blending subsidy, but he says there's a problem with it.

Mr. JOHN NELSON (General Manager, Prairie Pride, Inc.): The real harm is where it gets abused when biodiesels made in South America and they do what they call the splash and dash.

MORRIS: Argentinean biodiesel comes into U.S. ports. Blenders splash in a little diesel, ship it all off across the Atlantic, and collect the subsidy. Europe bought almost 300 million gallons of biodiesel from the U.S. last year — some domestically produced, some from Argentina, all of it subsidized.

Dan Rotenberg, with the European Commission, says the subsidy undercuts European producers.

Mr. DAN ROTENBERG (Counselor for Agriculture, European Commission): Well, basically you have the U.S. taxpayer which is subsidizing European consumers and Argentinean producers of biodiesel.

MORRIS: Rotenberg says biodiesel imports from the U.S. shut up tenfold last year. The E.U. is threatening sanctions that exports will probably ease next year anyway. That's when mandates kick in requiring U.S. oil companies to buy a certain amount of biodiesel — a billion gallons a year by 2012. Still, that's less than half the current U.S. production capacity.

And while soybean prices have dropped recently, Iowa State University economist Bruce Babcock says all those mothballed biodiesel plants stand ready to deprive the industry of the low soy prices that help spawn it in the first place.

Professor BRUCE BABCOCK (Economics, Iowa State University): If the vegetable oil price ever gets low enough, those plants will turn on and that creates a new floor price that is linked to the crude oil market, so we've really changed the way that crops are going to be priced.

MORRIS: Still, with oil becoming harder and harder to come by and environmental concerns mounting, the folks at Prairie Pride say they'll be ready when demand for biodiesel catches up with their capacity to produce the stuff. They just don't know when that may happen.

For NPR News, I'm Frank Morris in Kansas City.

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