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Global Biofuel Expansion and Energy Price Scenarios

This paper analyzes the expansion of biofuel production under different energy price environments. It examines the impact on agricultural commodity prices, trade patterns, and the competitiveness of biofuels. The study emphasizes the importance of technological innovation in reducing uncertainty and mitigating the effects on traditional food and feed crop prices.

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Global Biofuel Expansion and Energy Price Scenarios

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  1. Global Biofuel Expansion under Different Energy Price Environments by May Mercado Peters Paper for presentation at the Energy Conference on “The Economics of Alternative Energy Sources and Globalization: The Road Ahead,” Orlando, Florida, November 15-17,2009

  2. Motivation • Continued biofuel expansion globally; • Many questions arise because of the uncertainty of future petroleum prices; • Need a flexible tool to run different scenarios; and, • Need to capture supply and demand for key biofuel countries and major commodities.

  3. Dynamic PEATSim Model Livestock Feed Crops Area Processing Yield Biofuel Other Food Endings Stocks Domestic market Beginning Stocks Exports Imports Transmission factors Exchange rates Tariffs, Quotas International markets

  4. Biofuel Component Fully operational endogenous biofuel sector in the PEATSim model with the following built-in: • U.S. corn-based ethanol sector with DDGs use in the livestock sector; • Brazil sugarcane-based ethanol sector; and, • EU rapeseed oil-based biodiesel sector.

  5. The future value of petroleum price is uncertain 54 % 36 % 29 % 55 % 48 % 36 % Source: Energy Information Agency, U.S. Dept of Energy, March, 2009

  6. Hypothetical Scenarios • Reference Scenario: Global biofuel demand increases • Increase U.S. ethanol demand to meet RFS • Increase Brazil’s ethanol demand to meet its energy plan to 2030 • Increase EU’s biodiesel demand to meet 5% biofuel share to total transportation fuel by 2012 in line with EU’s Renewable Energy Directive

  7. Hypothetical Scenarios • Low Energy Price Scenario: • Reference Scenario + decrease petroleum price by 30% • High Energy Price Scenario: • Reference Scenario + increase petroleum price by 30%

  8. Low Energy Price Scenario vs. High Energy Price Scenario

  9. Table 1. Change in world price of selected agricultural commodities with varying energy price scenarios. Source: PEATSim model results

  10. Table 2. Impacts of global biofuel demand shifts on major biofuel feedstocks under varying energy prices Exports for USA and Brazil, Imports for EU Source: PEATSim model results

  11. To meet global biofuel demand increases, exports of corn increase in other countries of the world to compensate for export decline from United States. Source: PEATSim Model Results

  12. To meet global biofuel demand increases, exports of sugar increase in other countries of the world to compensate for export decline from Brazil. Source: PEATSim Model Results

  13. To meet global biofuel demand increases, exports of rapeseed oil in other countries of the world increase to meet increased demand from the European Union. Source: PEATSim Model Results

  14. Importance of Technology

  15. Supply curve shift needed to keep ethanol competitive with declining energy price (30 % reduction in petroleum price) 37% A37 % reduction in ethanol production cost is needed to keep ethanol use at reference scenario levels. This implied increased efficiency of U.S. ethanol production will allow it to compete with gasoline.

  16. Cellulosic conversion • At low price or reference scenario levels, cellulosic ethanol is not competitive with petroleum-based fuels. • If energy prices increase 30% more than expected, then cellulose, while competitive with petroleum-based fuel is still not competitive with corn-based ethanol.

  17. Conclusions • Impact of biofuels programs on agriculture markets is variable • Continued biofuel expansion spurred by alternative energy programs will lead to increasing agricultural commodity prices and to changes in patterns of trade in biofuel feedstocks. • A 30 % decline in petroleum prices (absent of mandate) would result in decline in biofuel use worldwide accompanied by a decline in feedstock and biofuel prices relative to the reference scenario. About 37 % decline in U.S. ethanol production costs is necessary to offset reduction in ethanol use due to lower petroleum prices. • A 30 % increase in petroleum prices will accentuate impacts of biofuel expansion policies on global agricultural markets, agricultural commodity prices and the direction of biofuel feedstocks trade .

  18. Conclusions (cont.) • Technological change could play a crucial role in reducing the uncertainty in the outlook for biofuels expansion. • Lowering production costs would permit biofuel to compete with petroleum based fuels in a low energy price environment. • Developing non-food related feedstocks would reduce the impact of biofuels expansion on traditional food and feed crop prices. • Efforts in technological innovation that focus on reducing the cost of producing ethanol by increasing feedstock conversion efficiency and increasing feedstock yields. They would offset the agricultural commodity price increases from global biofuel demand increases.

  19. The End

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