Will the Use of Biodiesel Affect Vegetable Oil Supply?

Filed in archive Opinion on August 22, 2006

Scott wrote a very interesting post on Biodiesel and its impact on the vegetable oil industry. The article that Scott referred to says that the increased use of biofuels, particularly biodiesel will have a negative impact on vegetable oil supply. The article does not say what bases there are for the claim. I work within the Biofuel industry and this is a question that from day one has been asked, "Will the use of biofuels decrease the supply of food?"

The question can be addressed in many ways. Allow me to answer it based on a simple economic theory, demand and supply. I present my drawing below and I have to apologize now because of my poor graphics skills.

Click on the Thumbnail to Enlarge

The horizontal axis refers to quantity (starting from zero at the origin and increasing as you go to the right) and the vertical refers to price (or value starting at zero from the origin and increasing as you go up). Suppose Demand for Canola Oil is represented by Demand 1 in the figure and the Supply of the oil is represented by Supply 1. The equilibrium or present case where suppliers and buyers agree to a price is point A. Now lets take the article into consideration. If more biofuels (in this instance biodiesel) is used, there will be an increase in demand. This movement is not along the demand curve (Demand 1) but is in fact an expansion of demand to a new schedule (that I call Demand 2). There is a discrepancy in price that buyers are willing to pay for the feedstock, from the original price to the new level set by Demand 2. Present sellers benefit from the windfall since they can now start selling their Canola oil for significantly more (the gray line connecting point A with Demand 2).

But what happens next? A profitable venture will not remain extremely profitable. Other players will come in (especially since there exists no barriers to entry in this simple economic explanation) and squeeze profits out of present players. What happens next is an expansion of supply to Supply 2 and a return to equilibrium that is now represented by point B.

My graph shows a price level that is pretty much the same, can this be true? Well, it could. Of course, there are other factors to consider regarding prices such as inflation, forex impacts, scale economies, transfer prices, etc., but again in this very basic explanation, these are unimposed.

So will there be a shortage in Canola oil? Not according to this theory. There will always be supply. As a matter of fact, Canola may not remain as the only feedstock preferred for producing Biodiesel. There is Jatropa (Jatropa curcas) and Castor Oil (Pongamia pinnata) and both are also showing great promise. It would not be that long till we see biofuel being produced from these feedstocks, and even waste oils and fats especially since new and improved technology is hatching left and right.

As always, necessity will be the mother of future biofuel inventions, and biodiesel is not an exception. So always keep tabs here and I will try to update you with current industry developments on alternative and renewable energy sources.