How can a business survive and thrive while spending $5.30 to make a product that sells for $1.90? That’s what’s happening in the booming renewable diesel (RD) market, where government subsidies allow RD to compete directly with petroleum diesel even though RD is inherently more costly to produce. But as new plants keep coming on stream, RD profit margins are coming under closer scrutiny. In today’s RBN blog, we analyze RD profit margins and show how they are changing as the market continues to expand.
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RD is made in oil refineries using bio-feedstocks like soybean oil and used cooking oil (UCO) instead of petroleum feedstocks. In Part 1 of this series, we examined how demand for different bio-feedstocks is stressing supply chains as RD producers compete for market share. The outcome of this feedstock competition is critical for the RD sector, which operates with “upside-down economics” that allow its product to remain competitive with petroleum diesel. How exactly does that work in real life? Let’s run the numbers.
For Case 1, let’s consider a representative RD plant receiving soybean oil feedstock and making RD for sale in California in April 2021, during the early stages of the RD boom. Because it is a direct substitute, RD sells for the same price as petroleum diesel, which is commonly called ultra-low sulfur diesel (ULSD) and was selling for a wholesale price of $1.90/gal at the time. (Also note the taxes are the same for both.) To make one gallon of RD required $4.30 worth of soybean oil feedstock. The plant had operating expenses (OPEX) of $0.50/gal and bore a capital charge of $0.50/gal, putting the total cost to produce RD at $5.30/gal, counting all three factors. With a wholesale price of $1.90/gal and a production cost of $5.30/gal, the “free market margin” was minus $3.40/gal (red-shaded box in Figure 1 below). By free-market standards, the RD plant was in deep water.
Figure 1. Renewable Diesel Economics, Soybean Oil Feed, April 2021. Sources: Hoekstra Trading LLC, RBN Energy
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About the song
“Upside Down” was written by Nile Rodgers and Bernard Edwards (Chic) and appears as the first song on side one of Diana Ross’s 11th studio album, diana. Released as the first single from the album, the song went to #1 on the Billboard Hot 100, Disco, and Soul Singles charts. It has been certified Gold by the Recording Industry Association of America. Personnel on the record were: Diana Ross (lead vocals), Bernard Edwards (bass), Nile Rodgers (guitar), Tony Thompson (drums), Andy Barrett (piano), Raymond Jones (keyboards), and Alfa Anderson, Fonzi Thornton, Luci Martin, Michelle Cobbs (backing vocals).
Recorded between December 1979 and March 1980 at the Power Station in New York, diana was produced by Bernard Edwards and Nile Rodgers. Ross and her production team had a falling out over the mixes, and she and Russ Terrana rerecorded her vocals and remixed the album at Electric Lady in New York, and Motown/Hitsville USA studio in Hollywood. The album was released in May 1980 and went to #1 on the Billboard Top R&B/Hip-Hop Albums, and #2 on the Billboard 200 Albums charts. It has been certified Platinum by the RIAA. Three charting singles were released from the LP.
Diana Ross is an American singer, songwriter and actress from Detroit. Ross rose to fame as the lead vocalist for The Supremes, Motown’s most successful act in the ’60s. She left The Supremes in 1970 to embark on a solo career that continues to this day. As a solo artist, she has released 25 studio albums, five live albums, 30 compilation albums, one EP, four soundtrack albums, and 91 singles. As an actress, Ross has starred in five motion pictures and been featured in 35 television shows. She has won seven American Music Awards, one Grammy Award, one Golden Globe Award, and one Tony Award. She has been awarded a Lifetime Achievement Grammy Award, a Presidential Medal of Honor, a Kennedy Center Honor, and has a star on the Hollywood Walk of Fame. She still records and tours, and released her 25th studio album, Thank You, in November 2021.
Comments
From "The Wizard of Oz", "Pay no attention to that man behind the curtain". RD is a taxpayer supported scam.