Whither Biofuels?

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There has been a tremendous increase in the production of biofuels, particularly ethanol, in recent years. In North America, at least, this increase in production has been policy driven. For a variety of reasons, the U.S. government, and to a lesser extent the Canadian government, have introduced a wide set of measures that have spurred growth in this area. The development of the biofuels industry has had a major impact on crop prices; the higher prices have generally benefited the crop sector while creating financial problems for the pork and poultry sectors in particular.

It is expected that the current policy environment will continue to determine the development and growth of the biofuels industry over the short term. The major drivers that have influenced policy to date - i.e., energy security, rural development, greenhouse gas concerns - can be expected to remain important and to continue to motivate policy makers (and particularly those in the United States) to support the industry through subsidization, mandated use, and trade restrictions (e.g., tariffs). Outside of countries like Brazil, which have the ability to profitably produce ethanol without major subsidies and policy measures, the economics of biofuel production are still such that production would be cut significantly if the policy measures were removed.

But what about over the longer term? Although the current policy drivers may remain important, a reasonable inference to make is that the underlying economics of biofuels will determine the future of this sector. There is therefore an expectation that for the industry to remain viable and sustainable over the long term, certain economic conditions will be required.

Two main economic factors are likely to determine the long-term profitability of the biofuels sector - the price of oil and the price of coal. Since the impact of these two factors on the sector is very different, it is useful to consider each in more detail. It should be noted that since biofuel production will be small compared to the production of conventional fuels, it will be the price of oil and coal that affect biofuels, not vice-versa.

Oil is important because it is used to create liquid fuels - fuels such as gasoline and diesel that can be used in vehicles. For liquid biofuels such as ethanol and biodiesel to be both (a) price competitive with existing liquid fuels and (b) profitable to produce, the price of oil must be relatively high. Thus, liquid biofuels will only be viable in an environment where the price of oil is high (a high price would be anything over $100-120 per barrel).

Coal is important because it is used as a solid fuel to heat buildings and generate electricity. Agricultural and foresty biomass can be both profitably produced and profitably used as a solid fuel (this can be done through direct burning or through gasification) only when the price of coal is relatively high. When the price of coal is low (as it is currently) then solid biofuels are not profitable to produce if they are sold at a price that makes them competitive with coal. However, as the price of coal increases, it becomes possible for solid biofuels to be cost competitive with coal and to be profitable to produce.

With these relationships as background, it is possible to make some inferences about the direction that the biofuels industry might take over the next 20 years. If oil prices continue to rise - driven upwards by such things as falling reserves and geopolitical unrest - then ethanol and biodiesel will likely be profitable to produce (it should be noted that the method of producing ethanol may shift from fermentation (which uses sugar found in seeds (e.g., corn, barley) or in plants such as sugarcane) to cellulosics (which can use a wide range of biomass including wood chips)). If coal prices were to rise - driven upwards by the introduction of limitations on carbon use and/or carbon taxes in order to reduce greenhouse gases - then agricultural biomass will be burned directly as a fuel. Of course, a rise in both the price of oil and the price of coal can be expected to make both liquid and solid biofuels profitable. Technology will also have an impact. For instance, the development of batteries that would allow cars to run on electricity would shift the demand from liquid to solid fuels, thereby making it more likely that biomass would be used as a solid fuel.

Depending on the relative price of oil and coal (both to each other and to biofuels), the biofuel industry could take different directions. These different directions will have very different impacts on agriculture. Two of the interesting areas are land use and agricultural research policy. For instance, the research required to produce biomass that could be used in direct burning may be different than the research required to grow biomass that would be used to produce cellulosic ethanol. Similarly, the land use patterns can be expected to be different if crop material is required for liquid biofuels rather than solid fuels. Regardless of the direction the industry takes, the policy environment within which it will develop will be important to support its development and ensure the appropriate infrastructure is put in place. Future blog entries will consider these issues of land use, agricultural research and policy.

This blog entry was co-authored by Murray Fulton and Lynette Keyowski. To read additional Illative Blog entries or to leave comments on this entry, please visit www.illativeblog.ca. The Illative Blog is an initiative by the Knowledge Impact in Society (KIS) Project based out of the University of Saskatchewan. Email correspondence can be sent to kis.project@usask.ca

1 Comments

Gavin said:

The long term policy on bio-industrial products will not necessarily be bio-fuels but I do believe that there is a very promising future in better utilizing bio-gases for home heating (this has long term benefits for ag). Every compressor station across the country provides such opportunity whereby 97% pure methane can be bought and sold on the market for home heating fuel. There is no requirement for retrofits, the product can be derived from fodder (crops for cellulose) and manure. Based on early research in Kansas, corn can produce $225 per acre for methane alone (bio-digestion) with a yield of 6 tonnes per acre. If cereal crops can generate 3-4 tonnes per acre of fodder, there is a significant opportunity beyond its use for either food or bio-fuels. If 97% methane is now viable with natural gas prices where they are, I think that we will soon see the public utility (TransCanada Pipeline) deregulated so that compressor stations can add alot more than pressure to the pipeline and at the same time create a long term sustainable renewable fuel to heat homes in the northern hemisphere.

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This page contains a single entry by Murray Fulton and Lynette Keyowski published on December 13, 2007 10:15 AM.

Grain Industry Structure in Western Canada was the previous entry in this blog.

Rural-Urban Symbiosis is the next entry in this blog.

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