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August 17, 2005
California diesel/biodiesel hits price inversion, others to soon follow
What happens when the price of a substitute product becomes cheaper than the incumbant? You got it, massive product switching. Since Biodiesel is a direct replacement for diesel (and tied to the commodity price of Soy instead of crude oil) you would expect big behavior switch when it becomes cheaper than diesel. This has already happpened in Hawaii where Biodiesel is consistently about $.40 a gallon cheaper than diesel (due to the fact that biodiesel is made on the island and #2 Diesel is imported). Now it has happened in California. The average price of #2 Diesel in Bakersfield is $3.17 and about $2.80 for 100% biodiesel. The price of #2 Diesel is up over $1.00 in a year, the price of Biodiesel only up about $.50.
Here in Washington, we are still waiting for cross over, but we are getting there quickly. The average price of #2 Diesel in Seattle is $2.85 a gallon up from $2.13 a year ago. 100% biodiesel is $3.10 up from $2.78 a year ago. Washington is going to take longer to go up in #2 diesel price because we have refineries quite close and don't have the special blend requirements of California.
Back to the original question. What causes a tipping point in a commodity market? What about when the replacement commodity becomes cheaper?
Posted by Martin at August 17, 2005 7:56 AM
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Comments
Unfortunately, retail price doesn't dictate behavior entirely, as there are other costs to consider:
1) Availability and cost to drive to bio-station
2) Perceived Risk of new fuel source (does the chief mechanic approve of the blend).
3) Stickiness of long term fuel contracts
4) Awareness of Solution/Price
#1 is being slowly fixed, but 2-4 are endemic to pretty much all technological innovations.
Posted by: Tom_at_TerraPass 
at August 22, 2005 8:10 AM
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