Scope and Method of Study. The purpose of this paper was to identify the reasons biodiesel fuel is not competitive on price with petroleum diesel and to evaluate the potential for biodiesel to compete on price in the future by indentifying improvements to cost structure. A hypothetical start up biodiesel production firm was created and compared to existing petroleum diesel producers. The basis of comparison was the cost to produce the respective fuels and the price received by the producers.

Findings and Conclusions. The most significant source of competitive disadvantage for the current biodiesel producer is the cost of feedstock. A promising alternative feedstock is any of several species of microalgae grown in an apparatus called a “photobioreactor.” Several firms are developing such an apparatus with varying degrees of success. However, to date, none have succeeded in deployment of a commercial scale facility. Level of investment per gallon of annual capacity has much greater effect on net present value than does production cost. The second greatest source of competitive disadvantage is production cost, due primarily to the scale of the petroleum industry. Distribution costs are also higher for the biodiesel firm. Successful deployment of commercial scale microalgae production may be able to overcome these three disadvantages.