Which makes more sense: Ethanol or biodiesel?

LAS VEGAS--Ethanol, says Michele Rubino, a managing consultant at Navigant Consulting.

"Biodiesel has worse economics," he said during a presentation at the Power-Gen conference taking place in Las Vegas. Many people, mainly biodiesel fans and executives, are going to dispute this, but here is how Rubino analyzed the situation.

For one thing, the cost of biodiesel compared to regular diesel at the moment isn't very good. A gallon of soy oil costs about $2 in the wholesale markets, he said, and processing it into biodiesel adds costs. Regular diesel goes for $1.80 or so. Thus, biodiesel needs the 50 cent to $1 subsidies per gallon that the U.S. government provides.

Biodiesel advocates were hoping that laws banning trans fats would cause the price of soy oil, one of the primary feed stocks for biodiesel, to drop. However, the drop occurred at the same time as a rise in the price of palm oil, the other big feed stock, so any gains from trans fat-free Choco Diles were effectively attenuated. Corn, the feedstock for ethanol, has been rising too, but still ethanol wins out.

Making biodiesel out of waste product like tallow or waste vegetable oil can drop the cost of the feedstock, but at most it would only account for one or two percent of the total diesel demand, according to stats from the University of Minnesota's Vernon Eidman.

Biodiesel also represents a smaller market, said Rubino. In 2005, about 12 billion gallons of ethanol were produced worldwide while only 1 billion gallons of biodiesel were produced (although both are growing rapidly. In 2006, biodiesel zoomed to 5 billion gallons, according to Eidman.) There are more diesel cars that can run on biodiesel than there are ethanol cars, but both fuels are mostly blended into petroleum products, so the potential advantage is attenuated.

Of course, both pale in comparison to petroleum, Rubino said. In 2005, the world burned up about 82.4 million barrels of oil a day. By contrast, biodiesel and ethanol combined accounted for 862,000 barrels a day. Thus, biodiesel and ethanol combined account for a little over one percent of the world's liquid fuel diet. But that also means there is room to grow.