News / Science & Technology
THE ECONOMICS OF BIOFUELS
Aside from rejecting biofuel expansion and use for environmental reasons (see Biofuels (Land and Water Concerns)1 and Biofuels (Miscellaneous)2 in our Subject Index), the production and use of biofuels from an economic perspective does not make much sense either.
Proponents of biofuels say their increased production will increase the supply of transportation fuels and therefore lead to lower prices. Critics of biofuels point out ethanol often costs more, not less, than gasoline, either because of production costs or supplies that can't keep pace with government mandates, and therefore leads to higher prices at least in the short run.
Ethanol has only two-thirds the energy content of gasoline, which makes it a poor value for most consumers. The production cost of ethanol (which is only one component in determining its price) has fallen as a result of technological innovation and economies of scale, but some properties of ethanol continue to make it expensive compared to gasoline. Transportation costs for ethanol, for example, are high because it picks up water as it travels through pipelines, diluting the ethanol and corroding the pipelines. Therefore, it has to be trucked to the Northeast and along the Gulf Coast. Ethanol must be kept in a different container at the terminal and is blended into the gasoline in the truck on its way to the retailer from the terminal. This has caused regional shortages, further increasing the retail prices in these areas (Dircksen, 2006).
