Ethanol – shall we really produce it?

Biofuel has become a new fashion! People are researching and trying to produce biofuel using anything – starting with grass & trees to cooking oil & trash. Americans & Europeans currently focus on producing biofuel out of corn (maize), while Latin America uses sugarcane instead. Is this an optimal solution for world’s fuel problems and will current situation lead us to a better future? No!

At the beginning let us examine what exactly will happen in USA and Europe where biofuel production is based on corn:
-) When producing ethanol from oil, ethanol producers increase the demand for corn, consequently also corn prices;
-) Other farmers see this and they are willing to plant more corn as well as to substitute other crops.
-) This, of course, decreases the supply of those other crops (soy, wheat etc.) that in turn increases their prices;
-) At this point one has to consider that USA and Europe don’t have enough free land that could be converted for farming purposes, hence the total supply of various corps is rather limited.

Now let us look at few consequences that would appear afterwards:
1) Firstly, this increase prices of food products produced from such crops say bread.
2) Secondly, it increases prices of products that are directly affected by price of such crops say meat as animals are fed with such crops. Effect might be seen also on egg, diary product and similar prices.
At the end of the day – we get more fuel but less and more expensive food.

On contrary Latin American countries producing ethanol from sugarcanes are in completely different and better situation:
1) Firstly, they have enough free land to increase sugarcane fields without having great effect on amount of corps produced for food purposes (as Brazil is already doing).
2) Secondly, ethanol from sugarcanes is produced more effectively and cheaper as one can avoid the expensive conversion of starch into sugars (that ethanol producers in USA and Europe using corn must undergo). Brazilian think-tank Icone states that biofuel (ethanol) produced from sugarcane costs 22 cents a litre compared to 30 cents a litre for biofuel produced from corn.
So at the end of the day – Latin American biofuel is cheaper, greener (as more effective and less energy needed to produce it) plus it doesn’t harm food industry and food supply as badly as corn based ethanol production does in USA and Europe.

At this stage I believe we should move to sugarcane ethanol, import it and use it to fuel our cars. Are we doing this? Not really, as currently Mr. Bush’s administration wants to foster biofuel production at home and hence it has applied subsidies for domestic production of ethanol, while also implementing tariffs on imports (54 cents on most imported ethanol).

This is exactly what we should not do! Instead we should import ethanol from Latin America as they have a competitive advantage of producing it. Such imports would also leave positive effects both on Latin American countries and USA & Europe:
-) It will enhance the ethanol production industry and Latin American economies in large by increased employment and creating new opportunities to gain profits, consequently this will also increase the living standards. For example, a recent study by Inter-American Development Bank has shown if Mexico would replace 10% of its petrol consumption by domestically produced ethanol, it would save around $2 billion a year and create 400’000 jobs;
-) This will further improve the relationships between Latin America and USA (as direct neighbours and as USA has imposed tariffs) and might increase pro-Western attitude in those countries that is always good for peace and stability of the world;
-) It will also help USA and Europe’s economies as taxpayers will be able to pay less for biofuel and have their cars running cheaper (being able to spend their money elsewhere). It will also keep the food industry stable and food prices down.

What is your opinion on this issue?

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One response to “Ethanol – shall we really produce it?

  1. well as long as you can produce bio-fuel below the costs (including direct production and enviroment) of buying it from Middle East (or other petroleum exporters), do it. it does not matter, which means you really use.

    one says that price of crops will go up. fine, but the price of fuel will go down. I would prefer paying for fuel 50 cents and 30 per bread instead of paying a dollar per fuel and 20 per bread.

    But to analyze the situation more careful, we have to make more calculations. including bloody elasticities, new and old prices of relevant products, and quantities demanded (something similar what was our thesis about). just to say that some prices will increase, without analyzing larger welfare impact is absurd.

    about US vs Brazil- I do not like tariffs. they will soon have to be removed, as it is defined by WTO membership. it is alowed to keep them only for a limited period (when the industry is in initial stage, or when the industry undergoes difficult adjustments). otherwise all other countries could revenge by putting tariffs on other goods to hurt the USA.

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