An Economic Analysis of the Future U.S. Biofuel Industry, Facility Location, and Supply Chain Network

Transportation Science (Forthcoming)

40 Pages Posted: 14 Jun 2012 Last revised: 29 Aug 2013

Xiaoguang Chen

Southwestern University of Finance and Economics

Hayri Onal

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics

Date Written: June 14, 2012

Abstract

This paper presents a price endogenous, dynamic, nonlinear mixed integer programming (MINLP) model to determine the feedstock supply response and future biorefinery locations that meet the mandated cellulosic biofuel production targets in the U.S. With a large number of supply units and potential processing locations involved, these two problems cannot be solved simultaneously directly using MINLP solvers. We propose a sequential two-stage solution procedure with feedbacks from each other to cope with this computational difficulty. The original MINLP model is decomposed into a price endogenous agricultural sector model that solves the supply response and equilibrium in agricultural product markets, and a dynamic linear mixed-integer programming (MIP) model that solves the optimum facility location and supply chain network. Due to the large number of binary variables involved, computational difficulty was also encountered when solving the MIP model. We employed a heuristic backward progression technique to cope with the difficulty. Using a moderately large test problem we demonstrate that the proposed solution procedure is computationally convenient and produces near-optimal solutions. We then apply this method to solve a large-scale model where nearly 3,000 U.S. counties are considered both as spatial supply units and potential refinery locations. Empirical results show that biofuel mandates will lead to a significant increase in food commodity prices and the optimum refinery locations would be in those states that have comparative advantage in producing biofuel feedstocks. We also find that incorporating the biofuel refinery locations in the land use decisions makes a considerable difference in the regional biomass production pattern.

Keywords: market equilibrium, feedstock supply response, biofuel facility location, MINLP

Suggested Citation

Chen, Xiaoguang and Onal, Hayri, An Economic Analysis of the Future U.S. Biofuel Industry, Facility Location, and Supply Chain Network (June 14, 2012). Transportation Science (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2084313 or http://dx.doi.org/10.2139/ssrn.2084313

Xiaoguang Chen (Contact Author)

Southwestern University of Finance and Economics ( email )

No55 Guanghuacun Street
RIEM, SWUFE
Chengdu, Sichuan 610074
China

Hayri Onal

University of Illinois at Urbana-Champaign - Department of Agricultural and Consumer Economics ( email )

1301 W. Gregory Drive
307c Mumford Hall (MC-710)
Urbana, IL 61801
United States
217-333-5507 (Phone)

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