Industrial Evolution. Lyle Estill

precious biodiesel, and send it off into the world as “B20.”

      And in doing so we found we could easily beat the North Carolina State Contract price for B20. At the time, most of the biodiesel flowing into North Carolina came from Iowa — sort of the Walmart of biodiesel. And it costs twenty-six cents a gallon to move a gallon of biodiesel from Iowa to North Carolina by rail. Not a bad price advantage to wake up with, in a world that is traded to the tenth of a penny.

      And so we started shipping. We picked up the Town of Cary. And the Town of Carrboro. And Chapel Hill. We picked up the Triangle Transit Authority for the region’s buses, and began to see our fuel flow into the Wolfline at North Carolina State University. In no time much of the B20 in the area started coming from our plant, and we were delighted to watch our terminal fill up with biodiesel and sail out the door atop its petroleum counterpart. It turns out no one gets fired for paying less than the price stipulated on the State Contract.

      There was one problem, however. And that was cash. When you buy petroleum at the rack, you pay cash. Everyone does. And you pay your share of state and federal taxes, which in North Carolina at the time amounted to around fifty-four cents a gallon.

      Delivering a single load required a lot of cash — most of which was spent on petroleum, which was not our high-margin product. And since virtually all of our customers were government agencies, they were not required to pay taxes. Which meant we had to claw our prepaid taxes back from both the State of North Carolina, and the IRS. Doing that is fun and easy, but it took time. Lots of time before we would see our cash returned to us.

      Plus, most of our fuel was delivered on terms. Bills are paid very quickly in the petroleum industry. Invoices turn in a matter of days — not weeks or months like some other industries. What all this boils down to is that shipping petroleum is a vastly cash-intensive business. My brother Mark was in charge of our financial engineering at the time, and he figured we would need three quarters of a million dollars a month of revolving cash in order to sustain our petroleum play.

      And we didn’t have it.

      One of the outcroppings of this strategy was that we accidentally took 100% of the business away from the petroleum distributors. For us, shipping a 7500-gallon tanker load required 1500 gallons of our product. For the distributor who used to have the Chapel Hill account, it meant losing the entire business.

      Which made our phones ring.

      Next thing I knew my calendar was filled with petroleum distributors, many of who had lost business to us, who were curious to find ways in which we could work together. Many came to the plant for a tour, where they were greeted by me — that same little guy who once sat in their lobbies. The same fellow for which they previously had no use.

      In no time our sales problem was fixed. Our million gallon per year biodiesel plant was happily included in the system that delivers four million gallons of petroleum diesel each day to those needing motive power in North Carolina.

      Piedmont Biofuels exited the petroleum business immediately. The strategy introduced us to the world, but we learned that it is best to leave the petroleum business to those with the vast capital reserves, and the rolling stock, and the tankage. We were better off just making our cleaner burning renewable fuel.

      By now we are well-known throughout the petroleum industry in our region, and we enjoy long and deep relationships with those petroleum distributors who traffic in biodiesel.

      Something that perpetually amazes me is the extreme cooperation that exists in the industry in general. The public pumps its fuel under the misguided notion that Exxon is different from Shell, and that one brand is different from another. The reality is that it is simply about moving liquids around and has much less to do with product than it does with logistics. In a business that is as mature as petroleum, the product flows through many hands before reaching the consumer, and the profit margin left behind for each handler is so low that it becomes all about who has which truck where and when.

      It is nothing for one distributor to lose a customer to another in the name of fetching a penny a gallon. Customers are not under contract, and are accustomed to leaving their suppliers for a tenth of a penny. Quotations go out to four decimal places and are good for the afternoon. Without bitterness, anger, or emotion, whole loads are lost and gained as a matter of course. Everyone is clear on one another’s cost structure, and everyone is clear on who will make money on the transaction, and many of the transactions are completed harmoniously.

      In North Carolina the public believes the business is characterized by cutthroat competition, but it is not. Every time there is a hurricane, which pinches our vulnerable fuel supplies, our boneheaded Attorney General makes a speech about how he is going to look into price gouging.

      The reality is that no one makes any money selling petroleum products “on the street.” Selling gas is a way to get consumers to stop in. The money is made on potato chips, lottery tickets, and cigarettes. Think for a moment about the newly automated dispensers that offer television, credit card processing, and fuel at the same time. They have one over-arching message: stop inside.

      Because one station posts a sign that reads 2.59.9, and the one across the street reads 2.58, the public believes that it is lock stock competition. Which it is not. Chances are good the same petroleum distributor owns each station, and the main objective of each is to sell more chocolate bars and coffee.

      The money to be made in the oil business is not with the poor schmuck selling gasoline. And it is not with the third generation distributor who is deploying vast assets for thin margins. For a time I believed the vast profits must lie with those who pull oil out of the ground, but it turns out that can also be a marginal undertaking. Most of America’s crude oil supplies today come from “stripper” wells, most of which are family owned, down on the ranch in Texas, Louisiana, and Oklahoma. Those are the lone pumping rigs in the middle of the field of cows or sagebrush, that are slowly going up and down like one of those glass birds with a belly full of water that is pretending to drink from a glass.

      Many of these wells require something like sixty dollars of cost to produce a single barrel of oil, and many produce as little as ten barrels a day. So when you are driving down the road and hear that oil hit a record $61.00 a barrel, keep in mind that some fellow in Oklahoma could be fetching $10.00 that day.

      The oil business is like any other. Everyone who is in it assumes there is more money to be made somewhere else. The producers envy the refiners, the refiners envy the pipelines, the pipelines envy the distributors, the distributors envy the gas station operators, and on it goes. The driving public, and the Attorney General, tend to be oblivious to the entire industry.

      Surely fortunes have been made. And lost. People gamble. People win. People lose.

      The notion that Piedmont Biofuels is any different from any other business undertaking is incorrect. We decided to become a processor. We developed an expertise in making fuel. Our petroleum equivalent would be the “refiner,” and that is where we placed our bet.

      As the industry matures, it turns out that making biodiesel is an extremely marginal activity. We spend our days wishing we were producers of feedstock. We wish we could create poultry fat, or crush seeds into oil, or be anywhere other than at the mercy of those who control the resource upon which we depend. But those who control our feedstocks envy our position, to make fuel. And those who are distributing the fuel have a prurient interest in our business as well, since they, too, are living on razor-thin margins.

      We put our money on biodiesel. We were convinced it would either “win, place, or show.” It’s been a long race, and so far we have yet to scrape winnings off the table. We haven’t given up, but the word to those who envy the producers of biodiesel is “Pick another horse.”

      Fortunately for Piedmont we don’t just make biodiesel. On the winding road to our eco-industrial park, we spawned a number of internal and related businesses that allowed us to hedge our bets.

3

       Accidental