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BIOFUELS PRODUCTION ECONOMICS AND ISSUES by rlj20071

VIEWS: 7 PAGES: 23

									      Office of the Chief Economist
      Office of Energy Policy and New Uses



Biofuels Production: Economics and Issues
   Annual Meeting of the Chemical Reaction Engineering
                        Laboratory
                 Washington University
                    St. Louis Missouri


                 Harry S. Baumes, Ph. D.
                   Associate Director



          Office of Energy Policy and New Uses

                     October 8, 2008
       Office of the Chief Economist
       Office of Energy Policy and New Uses



                OVERVIEW
•   Background: BIOFRENZY
•   Current Environment
•   Issues
•   Looking Ahead
                                                        Office of the Chief Economist
                                                        Office of Energy Policy and New Uses



                                                                   Biofuels Production
                                   U.S. Ethanol Production, 1980-2007                                                                                     U.S. Biodiesel Production, 1999-2007
                  7000                                                                                                                       500


                                                                                                                                             450
                  6000
                                                                                                                                             400


                  5000                                                                                                                       350


                                                                                                                                             300




                                                                                                                           Million gallons
Million gallons




                  4000

                                                                                                                                             250

                  3000
                                                                                                                                             200



                  2000                                                                                                                       150


                                                                                                                                             100
                  1000
                                                                                                                                             50


                    0                                                                                                                         0
                         1980   1982   1984   1986   1988   1990   1992   1994   1996   1998   2000   2002   2004   2006                           1999     2000   2001   2002   2003   2004   2005   2006   2007




                          2007/08 marketing year, corn use in ethanol accounted for 23% of crop,
                          soybean oil use for biodiesel accounted for 14% of soyoil production and
                          10% of soybean production
     Office of the Chief Economist
     Office of Energy Policy and New Uses



             BACKGROUND
• High Oil and Gasoline Prices
• 2006, 2007 and 2008 State of the Union
  Addresses
• Shift from Low to High Corn and
  Commodity Prices
• Investment in Biofuels Industry slowing
• Global Economic Growth Slowing
        Office of the Chief Economist
        Office of Energy Policy and New Uses



                BACKGROUND
• Energy Policy Act of 2005
  – RFS1
  – MTBE
• Energy Independence and Security Act of 2007
  – RFS 2
  – GHG Reductions
• Food, Conservation and Energy Act of 2008
  – Energy Title IX
                                            $/bbl
              Ja
                n-




                         0
                             20
                                  40
                                       60
                                             80
                                                    100
                                                          120
                                                                140
                                                                      160
                   0
              M 0
               ay




Source: EIA
                  -0
              Se 0
                 p-
                    0
              Ja 0
                n-
                   0
              M 1
               ay
                  -0
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                 p-
                    0
              Ja 1
                n-
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              M 2
               ay
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                    0
              Ja 2
                n-
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              M 3
               ay
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              Se 3
                 p-
                    0
              Ja 3
                n-
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              M 4
               ay
                  -0
              Se 4
                 p-
                    0
              Ja 4
                n-
                   0
              M 5
                                                                                                      Office of the Chief Economist




               ay
                  -0
              Se 5
                 p-
                    0
              Ja 5
                                                                            West Texas Intermediate




                n-
                   0
              M 6
               ay
                  -0
              Se 6
                                                                                                      Office of Energy Policy and New Uses




                 p-
                    0
              Ja 6
                n-
                   0
              M 7
               ay
                  -0
              Se 7
                 p-
                    0
              Ja 7
                n-
                   0
              M 8
               ay
                  -0
              Se 8
                 p-
                    08
            Office of the Chief Economist
            Office of Energy Policy and New Uses



                                                      Ethanol and Corn Prices



                            Corn Chicago $/bu            U.S. Avg Ethanol $/gal

          8.00
          7.00
          6.00
Dollars




          5.00
          4.00
          3.00
          2.00
          1.00
          0.00
                 1/7/1999

                                1/7/2000

                                           1/7/2001


                                                         1/7/2002

                                                                    1/7/2003

                                                                               1/7/2004

                                                                                          1/7/2005

                                                                                                     1/7/2006

                                                                                                                1/7/2007

                                                                                                                           1/7/2008
           Per Bushel




     -1.00
      0.00
      1.00
      2.00
      3.00
      4.00
      5.00
      6.00
      7.00
      8.00
      9.00
1/7/1999

7/7/1999

1/7/2000

7/7/2000

1/7/2001

7/7/2001

1/7/2002

7/7/2002

1/7/2003

7/7/2003

1/7/2004
                                                      Office of the Chief Economist




7/7/2004

1/7/2005
                        Ethanol - Corn Price Spread
                                                      Office of Energy Policy and New Uses




7/7/2005

1/7/2006

7/7/2006

1/7/2007

7/7/2007

1/7/2008

7/7/2008
                      Office of the Chief Economist
                      Office of Energy Policy and New Uses



        40
             EISA – EPACT Renewable Fuels Standard
               RFS1          Conventional - Corn Starch          Biobased Diesel          Cellulosic Biofuels          Other Advanced Biofuels


        35
                                                                                          Other Biofuels
        30



        25

                                   Biobased Diesel
Years




        20
                                                                                                  Cellulosic Biofuels
        15



        10                                                                   Conventional Corn Starch

        5
                                                                 RFS1
        0
        2006   2007   2008     2009    2010     2011      2012    2013    2014     2015    2016     2017        2018   2019   2020    2021       2022
                                                                     Billion Gallons
       Office of the Chief Economist
       Office of Energy Policy and New Uses


     The Current Environment
• Oil Prices over $100/bbl
• 13.6 bgpy of ethanol capacity by 2009
  – Low - Declining margins
  – Investment costs risen about 40% in last 18 months –
    investment slowing
  – Blending Premium
• 3.5 bgpy of biodiesel capacity by 2009
  – High feedstock costs
  – Negative - Declining margins
      Office of the Chief Economist
      Office of Energy Policy and New Uses


     The Current Environment
• Political Environment – state of flux
  – EISA
  – Food and Fuel
  – RFS Waiver Request – Denied by EPA
• Farm Bill
  – Reduces tax credit for ethanol
  – Research, education, and financial assistance
    monies available
Office of the Chief Economist
Office of Energy Policy and New Uses



                       Ethanol 101
                                  September November     Sept. 26,
                                        2005     2007       2008
Corn Price, Cash          $/bu           2.25     3.50       5.02

Feedstock                 $/gal         0.82      1.27       1.83
DDG                       $/gal         0.32      0.34       0.49
Net Corn Cost             $/gal         0.50      0.93       1.34

Energy                    $/gal         0.15      0.24       0.24
Other                     $/gal         0.35      0.40       0.43

Cost to Produce           $/gal         1.00      1.57       2.01

Ethanol Price             $/gal         2.40      1.70       2.34

Net to Ethanol Producer   $/gal         1.40      0.13       0.33

Tax Credit Blenders       $/gal         0.51      0.51       0.51
Net Cost of Ethanol       $/gal         1.89      1.19       1.83

Gasoline (wholesale)      $/gal         2.50      2.58       2.75

Premium to Blend          $/gal         0.61      1.39       0.92
     Office of the Chief Economist
     Office of Energy Policy and New Uses



                     Biodiesel 101
                                    September November     Sept. 26
                                          2005     2007       2008
Soybean Oil                 $/lb           0.23     0.40       0.47

Feedstock                   $/gal         1.74      3.00      3.53
Other                       $/gal         0.50      0.55      0.65

Cost to Produce             $/gal         2.24      3.55      4.18

Biodiesel Price             $/gal         2.60      3.60        4.7

Net to Biodiesel Producer   $/gal         0.36      0.05      0.53

Tax Credit Blenders         $/gal         1.00      1.00      1.00
Net Cost of Biodiesel       $/gal         1.60      2.60      3.70

Diesel (wholesale)          $/gal         2.50      2.64      3.27

Premium to Blend            $/gal         0.90      0.04      -0.43
                              Office of the Chief Economist
                              Office of Energy Policy and New Uses


                                              Ethanol Industry: Overview
                                    Plants              Plants (UC)               Capacity UC (L)               Capacity

                   12000                                                                                                            180


                                                                                                                                    160
                   10000
                                                                                                                                    140


                   8000                                                                                                             120
Mil Gal Per Year




                                                                                                                                    100




                                                                                                                                          Number
                   6000
                                                                                                                                    80


                   4000                                                                                                             60


                                                                                                                                    40
                   2000
                                                                                                                                    20


                      0                                                                                                             0
                           Jan-99    Jan-00   Jan-01   Jan-02   Jan-03   Jan-04   Jan-05     Jan-06   Jan-07   Jan-08      Sep-08


      Source: Renewable Fuels Association
                              Office of the Chief Economist
                              Office of Energy Policy and New Uses


                                              Biodiesel: Industry Overview
                                   Plants               Plants (UC)                 Capacity UC (L)                Capacity


                   2500                                                                                                           180


                                                                                                                                  160

                   2000
                                                                                                                                  140


                                                                                                                                  120
Mil Gal Per Year




                   1500
                                                                                                                                  100




                                                                                                                                        Number
                                                                                                                                  80
                   1000

                                                                                                                                  60


                                                                                                                                  40
                   500

                                                                                                                                  20


                     0                                                                                                            0
                          Sep-01     Sep-02    Sep-03   Sep-04        Sep-05   Jun-06    Sep-06       Nov-06   Jan-07    Jan-08
           Source: National Biodiesel Board
       Office of the Chief Economist
       Office of Energy Policy and New Uses


               Looking Ahead
• Cellulosic Ethanol
  – Research reduce cost – DOE target $1.10/gal
  – Initial investment cost high - $600 million
  – Harvest,storage and transport of biomass
• Research
  – Energy Crops: Switch grass, hi-volume sorghum,
    miscanthus, energy cane, …
  – Woody Biomass: hybrid poplars, willows
  – Crop Residues
• DOE Funding Pilot Plants
      Office of the Chief Economist
      Office of Energy Policy and New Uses


              Looking Ahead
• Issues
  – Resource Use: Land and Water
  – Environment and conservation
  – Food & Fuel/Renewable Energy
        Office of the Chief Economist
        Office of Energy Policy and New Uses



    Factors influencing Commodity
             & Food Prices
•   Global Economic Growth
•   Weather
•   Export Restrictions
•   Food Production and Marketing Costs
•   Value of the US Dollar
•   Biofuels Production
                       Office of the Chief Economist
                       Office of Energy Policy and New Uses


              Food Production and Marketing Costs
                                                                Profits, 4.0%
                            Depreciation and
                              Repairs, 5.0%
                 Rent and Interest,
                       6.5%


                 T axes and Other
                    Costs, 7.0%
                                                                                Labor, 38.5%

                                             Energy and
                                          T ransportation ,
                                                8.0%

                                              Advertising and
                                             Packaging, 12.0%
                                                            Farm value, 19.0%



Source: Economic Research Service
Ephraim Liebtag, Calculations using 2006 Data, August 7, 2008
                                                 Mil. Bu.
19
  75




           0
                    2,000
                                 4,000
                                         6,000
                                                            8,000
                                                                             10,000
                                                                                                12,000
                                                                                                         14,000
19 /76
  76
19 /77
  77
19 /78
  78
19 /79
  79
19 /80
  80
19 /81
  81
19 /82
  82
19 /83
  83
19 /84


                                                                    Food, Seed, &
  84
19 /85
  85
19 /86
                                                                    Industrial (non-fuel)
  86
19 /87
  87
19 /88
  88
19 /89
  89
19 /90
  90
19 /91
  91
19 /92
  92
19 /93
                                                                                                                      Corn Use




  93
                                                                                                                  Corn Use




19 /94
                                                                                                                                 Office of the Chief Economist




  94

               Feed & Residual
19 /95
                                                                                  Exports




  95
19 /96
  96
19 /97
  97
19 /98
  98
                                                                                                                                 Office of Energy Policy and New Uses




19 /99
  99
20 /00
  00
20 /01
  01
20 /02
  02
                                                                                            Ethanol




20 /03
  03
20 /04
  04
20 /05
  05
20 /06
  06
20 /07
  07
20 /08
  08
     /0
       9
               Office of the Chief Economist
               Office of Energy Policy and New Uses



    Increased Biofuels Production
•   Growing demand source for corn and soybean oil

•   Has been a contributing factor to the rise in corn and soybean prices.
    Over the past 2 years biofuels production has accounted for
     – 30% of the increase for corn
     – 40% of the increase for soybeans

•   In 2007, food CPI increased by 4%
     – increase in biofuels production added estimated 0.10 – 0.15
        percentage point

•   After market adjustments, increase in biofuels production could add
    0.6 to 0.7 percentage point to the food CPI

•   USDA looking at lower food price inflation in 2009
Source: Office of the Chief Economist
Office of the Chief Economist
Office of Energy Policy and New Uses




   Friday, July 4, 2008 by
   The Guardian / UK
     Office of the Chief Economist
     Office of Energy Policy and New Uses




               THANK
                YOU!
Contact Information: Harry S. Baumes
hbaumes@oce.usda.gov
202-401-0497

								
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