By Ashwani Kumar
| October 22nd 2009 05:05 AM | Print
Biofuel use in the transport sector
Because transport fuels are almost exclusively petroleum derived, the rapid real price increases for oil in the 1970s left the transport sector in most oil-importing countries extremely vulnerable. As a result, many countries explored biofuel substitution options. Among the developing countries, Brazil’s aggressive sugarcane-to-ethanol programme provides the best available data and lessons on the economics of biomass-derived transport fuels.
Brazil’s commitment in 1975 to increase its use of ethanol as a petrol extender was started in response to several internal pressures - a tripling of world oil prices, low international sugar prices, 1° and high unemployment in agricultural areas. The rapid expansion of alcohol production and increasing fuel use in Brazil due to the alcohol programme can readily be seen in Figure 1. Estimates of ethanol production costs in Brazil vary from US$0.18 to $0.48/litre(1) or $28-76/bbl petrol.
However, most studies estimate the costs at $0.23-0.30/1.11 Much of this variation is explained by the inclusion or exclusion of economic (as contrasted with financial) costs, differing technical assumptions, and substantial chronic currency devaluations. If recent oil price savings
were passed on to oil processors, the programme would appear to be
financially infeasible on a production cost basis at 1987 oil prices.
Beyond a financial assessment, a set of macroeconomic incentives and
disincentives from the programme must also be considered. Even
assuming conservative sugarcane production yields, the energy balance reportedly favours ethanol production, with external energy inputs accounting for only 30% of the energy content available in ethanol. Also, the foreign exchange savings, which include direct petroleum plus
indirect capital savings, are significant to Brazil.
Against such benefits are the large government subsidies spent to
encourage sugarcane and ethanol production. In 1984 the government
supported the programme through two primary mechanisms. First, it set a floor price by guaranteeing the purchase of all authorized ethanol production at $0.25/1; second, it provided large ethanol investment loans at negative interest rates - 13-17% loan rates - which cost the
government about $0.06/1.14 Even after substantially reducing investment
subsidies in 1981, the government still reportedly financed
two-thirds of the industry’s capital costs.15 A third controversial issue
surrounding the programme is the displacement of food production in
Brazil. This dilemma is not solely attributable to the alcohol programme.
Although the expansion in basic food production has lagged behind
increases in population demand, land devoted to other export crops
such as soybeans has seemingly expanded more rapidly than increases in
sugarcane production. However many argue that, given national
economic price incentives for cash and export crops, basic food crop
production has suffered.
Other economic consequences of the programme are impacts on
employment, rural industrialization, and capital investment needs. It
can be argued that the highly labour-intensive process of cane and
ethanol production favours developing economies’ factors of production.
However, unless accompanied by alternative employment options
in the off-season, the temporary nature of labour demands in cane
production can create high social costs. Estimates vary for the Brazilian
experience, but employment estimates range from 500 000 to 1 million
workers. About 75-90% of the labour demand and income created by
the programme remains in the rural agricultural sector, although this
programme provides only 3% of agricultural jobs in Brazil. In contrast
to other countries, the progamme has helped the Brazilian sugarcane
industry expand and strengthen significantly. It is now better diversified
and healthier financially. In regard to capital requirements, investment
costs in the ethanol fuel industry are reportedly much lower than for an
oil-refining petrochemical complex. 16
Besides Brazil, other developing countries such as Argentina, Costa
Rica, Kenya, Malawi, Swaziland and Zimbabwe have also committed
themselves to ethanol production, with varying degrees of success due
to recent changes in oil prices and ethanol import restrictions into the
USA. 17 A 1984 study for Thailand showed the proposed ethanol
production from molasses to be economic in some regions at a 20%
blend, cassava to be a superior feedstock over sugarcane, and a positive
net effect on Thailand’s balance of payments, is Provided US import
restrictions are changed, a Caribbean Basin study suggested that
exporting fuel alcohol to the USA as octane enhancers for petrol blends
was economical and provided net employment gains, increased exports,
and reduced petroleum imports. 19 In 1980, despite the Papua New
Guinea government recommending ethanol production from sago palm
based on a financial basis, no financial institutions were willing to
commit themselves to the project.
These initiatives suggest that currently only under optimal financial or
subsidized conditions is alcohol production for fuel seen as competitive
with petrol. The hesitancy of most governments and financial institutions
to adopt such programmes as Brazil’s implies that the perceived or
real risks are still too high and the economic gains too low, given current
relative fuel prices. While the costs of some biofuel technologies are
expected to fall, 2° unless oil prices rise significantly again (as expected
by the mid-1990s), environmental standards change in the developing
world, or total cost reductions occur for biofuel technologies, biofuel
use in the transport sector is limited. In the past, the decision to follow a
liquid biofuel path in the transport sector seems to be based as much on
political as on national economic priorities.