Biofuels: the Biggest Supply Response to the 2000s

There are four kinds of liquid fuel alternatives to crude oil in actual commercial production at the present:

* Biofuels – ethanol and biodiesel, primarily from food crops around the world
* Tar Sands – synfuel and bitumen, primarily from Canada
* Gas-To-Liquids (GTL) – from South Africa, Malaysia, and increasingly Qatar
* Coal-To-Liquids (CTL) – primarily from South Africa, but just starting in China

Stuart Staniford –  I have argued in the past that there are structural reasons for this: given the comparatively low capital requirements and small plant size of biofuel plants, they can respond much faster to episodes of high oil prices than can the other sources, all of which tend to involve larger, slower-to-build, more capital intensive plants. This has important implications for food and land prices in future oil price shocks. Food prices are likely to rise quickly and markedly in response to oil shocks, public policy permitting.

This is something I argued back in an early 2008 Oil Drum post, Fermenting the Food Supply. Essentially, converting food to fuel becomes increasingly profitable at high oil prices (and at sufficiently high prices this doesn’t require subsidies), and because ethanol plants are relatively small and numerous, it’s possible to build more of them very quickly, converting ever more of the food supply to fuel.

In the US, 2009 data is now available for the corn harvest, and combining this with data from the renewable fuels association, I updated one of the graphs from Fermenting the Food Supply.  This shows the total ethanol potential for the entire US corn crop in the background (mid pink), and the capacity of ethanol plants either under construction or in production in the foreground (see inset)

The bad news is that we are now in a position to convert over 40% of the US corn crop to ethanol.  The good news is that the process has slowed down, at least for now.  The combination of the 2008 collapse in oil prices, and possibly the beginning of pushback on the ethanol lobby due to the effect on food prices, has caused a reduction in the amount of ethanol capacity buildout.

Still, the ethanol industry is now building from a very high level, and further increases at anything like the growth rates of the mid 2000s would quickly consume most of the remaining corn.

This process is very sensitive to public policy, since the amount of ethanol allowed and/or mandated in gasoline is set by law. 
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