Global Biofuel Expansion under Different Energy Price Environments

byMay 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

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.

Internationalmarkets

Domesticmarket

Transmission factorsExchange rates

Tariffs,Quotas

Crops Area

Yield

Livestock

Processing

ImportsExports

Feed

FoodBiofuelOther

Beginning Stocks

EndingsStocks

Dynamic PEATSim ModelDynamic PEATSim Model

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.

The future value of petroleum price is uncertain

Petroleum price, three cases, 2006-2017

0

20

40

60

80

100

120

140

160

180

200

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

20

07

US

$/b

arr

el EIA Low EIA Base EIA High

Source: Energy Information Agency, U.S. Dept of Energy, March, 2009

54 %54 %

36 %36 %48 %48 %

55 %55 %

36 %36 %29 %29 %

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

Hypothetical Scenarios

• Low Energy Price Scenario:

–Reference Scenario + decrease petroleum price by 30%

• High Energy Price Scenario:

–Reference Scenario + increase petroleum price by 30%

Low Energy Price Scenario

vs.High Energy Price

Scenario

Commodity Reference Low Energy Price High Energy Price

% change from base

Corn 5.9 1.2 9.8Rapeseed 10.0 2.3 16.8Rape oil 17.4 4.0 29.3Rape meal -5.5 -1.4 -8.7Sugar 3.1 0.6 5.0Wheat 1.6 0.3 2.6Soybeans 2.1 0.4 3.4Soy oil 4.4 1.0 7.2Beef & veal 2.0 0.4 3.3Pork 1.2 0.2 2.0Poultry 1.5 0.3 2.5

Table 1. Change in world price of selected agricultural commodities with varying energy price scenarios.

Source: PEATSim model results

Region Commodity

Reference Scenario Low Energy Price Scenario High Energy Price Scenario

Prod’n Cons’n Trade * Prod’n Cons’n Trade * Prod’n Cons’n Trade *

% change from base

U.S. Corn 1.3 5.5 -19.4 0.3 1.1 -4.1 2.2 9.0 -31.8EU Rape

seed2.4 3.4 18.6 0.6 0.8 4.4 3.9 5.8 32.5

Rape Oil 3.5 9.1 39.1 0.8 2.3 9.7 5.9 14.7 61.8Rape Meal

3.5 4.2 5.9 0.8 1.0 1.5 5.9 6.9 4.5

Brazil Sugar 1.4 3.8 -4.8 0.3 0.8 -1.0 2.2 6.1 -7.7Global Corn 1.4 1.3 -9.1 0.3 0.3 -1.9 2.2 2.2 -13.7

Sugar 1.0 1.0 -1.8 0.2 0.2 -0.4 1.5 1.6 -2.8Rape

seed2.4 2.4 5.8 0.6 0.6 1.4 3.9 3.9 9.7

Table 2. Impacts of global biofuel demand shifts on major biofuel feedstocks under varying energy prices

Source: PEATSim model resultsExports for USA and Brazil, Imports for EU

Change in corn exports under varying energy prices

USA

USA

USA

BRZ

BRZ

BRZ

ARGARG

ARG

World

World

World

-40

-30

-20

-10

0

10

20

30

40

50

60

Reference Low Energy Price High Energy Price

% c

hang

e fro

m b

ase

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

Change in sugar exports under varying energy prices

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

Reference Low Energy Price High Energy Price

% c

hang

e fro

m b

ase

Brazil EU Australia World

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

Change in rapeseed oil exports under varying energy prices

0

2

4

6

8

10

12

14

16

18

20

Reference Low Energy Price High Energy Price

% c

ha

ng

e fr

om

ba

se

Canada PEATSim ROW World

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

Importance of

Technology

Supply curve shift needed to keep ethanol competitive with

declining energy price (30 % reduction in petroleum price)

A 37 % 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.

Ethanol Supply

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

0 5 10 15 20 25Quantity

Pri

ce

Supply (reference scenario) Supply (30% energy price dec)

37%37%

Cellulosic conversion

Fuel Break-even price

Scenarios

Reference Low-price High-price

Corn-based $4.00 $3.39 $3.24 $3.52

Petroleum $144 $112 $79 $156

• 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.

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 .

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.

The End