Biofuels Supply Risk and Price Volatility
28 Pages Posted: 27 Dec 2014
Date Written: December 20, 2014
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: Suggested Citation