POINTERS: Western Biodiesel Policies and Its Impact on World Vegetable Oils Complex

By: Mr. A. Fadzli Abdul Aziz.

A. Fadzli Abdul Aziz was appointed as the Regional Manager for Americas for the Malaysian Palm Oil Council (MPOC) in 2011. He joined MPOC in 2008 and was the desk officer for the Americas region prior to his appointment in Washington DC. Among his current responsibilities in Americas are to promote Malaysian Palm Oil, gather and compile market intelligence reports, identify problems, challenges and opportunities, monitor the American oils and fats situation and organise and coordinate Malaysian missions to ensure continuous acceptance of palm oil from Malaysia. Before joining MPOC, he was an Assistant Manager, Marketing at the Kulim Technology Park Corporation (KTPC), the developer and manager of Kulim Hi-Tech Park (KHTP). While at KTPC, he was part of the marketing and promotional team whose main responsibility was to bring FDIs into KHTP, a task which required him to travel regularly to many countries in Europe, Africa and Americas. In 1999, A. Fadzli Abdul Aziz graduated from the School of Law and Public Administration, Universiti Teknologi Mara, Shah Alam, with honours in Corporate Administration. He had his secondary education at the Royal Military College, Sungai Besi, Kuala Lumpur and his primary education in Penang, where he was born in 1976. He is married with two children and lists reading, travelling, playing sports and bungee jumping as his favourite activities outside of work.

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This paper is meant to be an informative paper on the historical and political shape of the Western biodiesel industry and how the development of the industry, aided by generous federal funding and mandates, especially in the U.S., consequently leads global biodiesel demand.

Biodiesel entered the world market in 1999 and a year later, 62,000 MT of biodiesel were used worldwide. Fast forward 10 years later, the volume grew by an average of 306,000 MT per year, settling at about 3.13 million MT last year.

Interestingly, the growth of world biodiesel comes in two stages. The first stage is from the year 2000 until the year 2004. At this stage biodiesel grew marginally by only about 42,000 MT per year. Then a break point was established towards the end of 2004 that saw quite a steep growth in biodiesel demand. From 2005 until 2012, biodiesel demand grew by an average of almost 383,000 MT per year. Last year, world biodiesel demand peaked at 3.13 million MT and it is estimated that the demand will reach a record of 3.48 million MT this year.

The U.S. biodiesel industry is relatively new and very small compared to U.S. ethanol. Biodiesel in the U.S. started in the late 90s while ethanol began mass production as early as the beginning of the 80s. By the year 2000, the U.S. produced only about 4,260 Metric Ton (MT) of biodiesel while ethanol production reached almost 3.5 million MT.

Another interesting development that aided biodiesel growth then is the introduction of biodiesel mandate. In 2005, the Renewable Fuel Standard (FRS) was introduced. RFS was provided in the Clean Air Act that was added by the Energy Policy Act of 2005. RFS was reviewed in 2007 and the introduction of Energy Independence and Security Act 2007 saw further expansion of RFS which to date is known as the extended Renewable Fuel Standard (RFS2). The policies stimulated the industry which then spikes biodiesel growth for the next few years. By 2008, the U.S. biodiesel production peaked to about 1.49 million MT. Nevertheless, the industry growth was checked in 2009 as producers were hesitant on their future as Biodiesel Tax Credit was expiring. The U.S. Congress were concerned on the huge amount of spending needed to continue with the subsidy. This saw a decline in biodiesel production to only 1.16 million MT in 2009. Tax credit ultimately lapsed in 2010 and this saw further reduction in biodiesel production to only 670,000 MT. Many producers struggled without the tax credit. Several biodiesel producers in Iowa for example were only operating between 10 to 15 percent capacity. Overall, production slumped. It was clear by then that the U.S. biodiesel survival depends on both mandate and subsidies. Without either, the industry will dwindle and possibly even come to a halt.

Interestingly, the global biodiesel demand trend mirrors almost exactly of the U.S. biodiesel market. The global demand grew moderately between 2000 and 2004 and steeply after 2005. In terms of volume, total U.S. demand since 2000 is 7.32 million MT or almost 49 percent of the global demand (15.12 million MT). Clearly, U.S. biodiesel demand dominates the global demand.

Global demand seems to keep increasing year on year. A simple trend forecast sees that the demand will continue to grow to almost 6.88 million MT in the year 2022. However, U.S. demand which is mandated by RFS2 has reached a plateau last year and although the time has come for U.S. to review the mandate, it is not expected that the mandate will change especially when the local production capacity now stands at about 3 million MT a year. Therefore, it would be interesting to see if the global biodiesel demand will continue on its own path and grow upwards or will it be curtailed by the U.S. mandate and levels off in the coming years. The paper will also look at policies by other western countries and how the additional demand will impact the global oils and fats supply.