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Biofuels Supply Risk and Price Volatility

28 Pages Posted: 27 Dec 2014  

Hamed Ghoddusi

Stevens Institute of Technology - School of Business

Mandira Roy

Massachusetts Institute of Technology

Jessika E. Trancik

Massachusetts Institute of Technology; Santa Fe Institute

Date Written: December 20, 2014

Abstract

Biofuels have been evaluated based on their greenhouse gas emissions, costs, and potential scale of production. Here we propose that feedstock supply risks should be added to the list of key metrics for evaluating the performance and scalability potential of transportation biofuels. Biofuels rely on agricultural production as their primary input, which is subject to yield shocks. A risky feedstock supply in conjunction with a highly inelastic demand for transportation fuels can cause substantial fuel price fluctuations, cost volatility, and quantitative shortages if left unmanaged, which could negatively impact biofuels firms, consumers, and society, particularly as biofuels grow to meet policy mandates. We show that the historical yields and prices of major crops used as feedstock are volatile, with a volatility roughly comparable to that of crude oil. We outline the determinants of biofuels supply risks, and discuss how the magnitude of these risks may change with production scale and technological specifications. Finally, we discuss various policy-level and firm-level strategies for reducing the supply risks of biofuels, including geographical and crop diversification. Our analysis focuses on biofuels, but the general framework could be applied to analyze the expected price volatility and scalability potential of other technologies as well.

Keywords: Biofuels, Energy Security, Risk Management

JEL Classification: Q42, Q43

Suggested Citation

Ghoddusi, Hamed and Roy, Mandira and Trancik, Jessika E., Biofuels Supply Risk and Price Volatility (December 20, 2014). Available at SSRN: https://ssrn.com/abstract=2540274 or http://dx.doi.org/10.2139/ssrn.2540274

Hamed Ghoddusi

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

HOME PAGE: http://www.ghoddusi.com

Mandira Roy

Massachusetts Institute of Technology ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Jessika E. Trancik (Contact Author)

Massachusetts Institute of Technology ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

Santa Fe Institute

1399 Hyde Park Road
Santa Fe, NM 87501
United States

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