Biofuels!

Hey guys,

This article is about the pros and cons of biofuels as well as their consequences.

Corn ethanol, a biofuel, is derived from corn. This makes corn as a food and corn ethanol goods in competitive supply as they use the same factors of production. Hence, as corn ethanol increasingly becomes more lucrative, more farmers divert their efforts at producing these biofuels instead of conventional corn. As a result, the supply for conventional corn falls and prices rise (to about double! according to the article). This has far-reaching consequences as corn is a staple food - as tortillas, polenta, grits and chicha (variations of how corn is eaten in various cultures all around the world). Moreover, corn is also used as a major source of animal feed. Hence, this rise in price of corn might have a-maize-ing effects on not just the price of popcorn at Golden Village, but inevitably our grocery bills in general.

We also need to acknowledge that the total supply for corn in general does not remain stagnant. The USA, as mentioned in the article, is currently heavily subsidising corn ethanol production for various reasons - to decrease the country's dependence on imported oil, to explore viable "clean" energy alternatives, and so on. This is also true for other countries - for example, Malaysia is currently investing heavily in the production of palm oil as another biofuel. These investments and subsidies are precisely why (as stated above) the production of biofuel is increasingly lucrative for farmers. While more farmers are joining the market, (in the passage, it is quoted that even doctors are considering joining the biofuel industry) this is clearly not enough to offset the decrease in corn production as evidenced by the rising food prices.

The arguments for and against biofuels are numerous and complex, hence I will only attempt to detail a few mentioned in the article as well as elucidate how they relate to economic concepts.

The first is the assertion that biofuels are "cheaper" than conventional fossil fuels. This is in fact true when we consider the cost of for example, harvesting palm oil, as opposed to drilling for fossil fuels. As Ms How has previously pointed out, the latter is porne to failure and involves extremely high start-up costs (the construction of oil rigs, etc.) which is why the crude oil industry today is oligopolistic in nature. Furthermore, political conflicts in the Middle East, etc cause fluctuations in the global price of oil, introducing much uncertainty. Biofuels are energy sources that nearly every country can invest in and are more dependable than oil in that aspect. Hence, other than lower prices, it can also offer security.

The difficulty comes in when we attempt to determine whether biofuels are less pollutive and more energy efficient than fossil fuels (while we note that the first claim is environmentally motivated and the second economically motivated, they are complementary in nature). This is true if we compare, say, 1 unit of ethanol and 1 unit of gasoline - the former burns cleaner, gives off less pollution and is more energy efficient. But the story is not quite as simple as that.

A brief research tells us that in energy economics, the measure to use is EROEI - Energy Returned on Energy Invested (Energy Returned divided by Energy Invested). We cannot compare energy returns of ethanol and gasoline on a per unit basis, but also consider how much energy was invested into its production - the farming process, the industrial refining, etc. This is reminiscent of "economic profit" - to calculate profit, we take revenue (energy returns of the fuel in question) and subtract away economic cost (involving both accounting costs and opportunity costs of the production process). We make two observations:

(1) This is more complicated than it seems as calculating opportunity costs (and even accounting costs) can be ambiguous. For example, how would we accurately forecast the profit from the corn foregone by investing in corn ethanol. Worse still, how can we measure quantitatively the ecological damage done by countries such as Indonesia in clearing away virgin rainforests to develop oil palm planations?

(2) The comparison of EROEI to economic profit falls apart at some point because of the nature of energy. While companies are able to stay in the industry when they make normal profits, it does not in fact make sense to stay in the industry with an EROEI of 1 (i.e. no net energy produced), because no tangible benefit is in fact provided to the society after all the trouble you did to construct oil plantations and so on!

There's a lot more out there about this complex topic but I'm going to stop here. Like what Jian Hua pointed out below, I think the main issue here in tackling something like energy with economic concepts is that sometimes the objective is not the rational one (to maximise profit), but a ethical / moral compass is involved (e.g. being environmentally responsible, seeking sustainable development).

In writing this, I did a bit more research than just the article it was based on. If you're interested, you might want to read up more about the implications of EROEI , the ecological consequences of biofuels , and the inherent difficulties in comparing whether a "green energy" alternative is really better off for the planet.

- yongquan (: