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Biofuel and the Economics of Refineries . Gal Hochman With Geoffrey Barrow , Ella Segev , and David Zilberman. Introduction of alternatives. Concerns with climate change and energy security during the last century led to
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Biofuel and the Economics of Refineries Gal Hochman With Geoffrey Barrow, Ella Segev, and David Zilberman
Introduction of alternatives • Concerns with climate change and energy security during the last century led to • Biofuels, as well as the introduction of other alternatives to fossil fuels • Conservation, fuel efficient, and electric cars • Policy that supports and incentivizes the adoption of the new technologies
The petroleum refining: a closed economy crude oil is used to produce gasoline and diesel, as well as other petroleum products such as liquid-petroleum-gas and asphalt.
Putty-clay structure • The petroleum refining process is a capital-intensive process, whereby once a refinery is configured and the capital investment made short-term decisions are constrained by existing technologies. • This is an industry whose response to market fundamentals is limited in the short-run but becomes much more flexible in the long run.
Not a competitive environment • The petroleum refining industry is an oligopolistic industry • This leads to differences in • Environmental side effects • Dynamics of the introduction and adoption of alternatives energy sources • Pricing of various petroleum products • Distributional implications
The short-run implications from the introduction of biofuel • While the price of the petroleum based fuel declined, the price of other petroleum products increased. • Amount of petroleum based fuels declined, but total fuel consumed increased – the rebound effect. • However, the rebound effect is smaller the more market power do the refineries have (i.e., the smaller the number of the active petroleum refineries). • Amount of other petroleum products declines. • Amount of crude-oil consumed declined.
The long-run implications from the introduction of biofuel • Now, • The petroleum refinery can adjust the technology, as well as change the amount of crude consumed. • If the cost of technological change is sufficiently small, we get full adjustment and, in the long-run, the introduction of biofuels impacts only the petroleum based fuel. • These results depend on • The cost of technological change • Demand for the petroleum-based fuel
Policy conclusions from conceptual work The introduction of bio-products, other than biofuels, play a key role in significantly impacting use of crude oil and thus the impact of fossil consumption on the environment.
The implications to greenhouse gas accounting The rebound effect is substantially smaller than in previous studies that assumed competitive behavior. The fall in supply of fossil fuels affected production of other petroleum products resulting in an indirect effect, namely, the indirect co-product effect, where under plausible scenarios may be larger than the biofuel indirect land use effect.
When the conceptual model meets reality • But the US is an open economy • Incentives to consume less gasoline domestically shift resources abroad, as long as exports are profitable • Shift of supply of energy away from the US reduces production of liquid fuel abroad. • However, the main benefit to the US is an improved balance of trade.
The resurrection of ethanol Findings in the late 1990s regarding the effect of MTBE on ground water and its phasing out by 2005 in key states – e.g., California, New York, and Connecticut, led to the resurrection of ethanol
The ethanol decade • While focusing on the US and incorporating OPEC behavior into the analysis, we evaluate the effect of the introduction of biofuels on • gasoline prices – decline, • the rebound effect – smaller than suggested in models that do not take into account the petroleum refining industry, • trade flows – impacted significantly, • petroleum products – mix shifts away from gasoline, and • greenhouse gases – limited
Ethanol and gasoline prices The introduction of ethanol resulted in reduction of 2.5 US$ per barrel – a reduction of about 3% of the price of gasoline.
Energy security In 2005, the US consumed 3,343,131 thousand barrels annually of finished motor gasoline In 2011, the US consumption of finished motor gasoline declined to 3,194,754 thousand of barrels annually Amount of ethanol consumed in the US in 2011 equals 67.25% of reduction in finished motor gasoline consumption.
Ethanol displaces gasoline From 2002 to 2011, the US consumed 31.2 billions gallons of ethanol
Impact on the balance-of-trade During the last decade, flow of US currency declined by almost 100 billion US$ Because the US imports energy, a more favorable balance of trade yields lower energy prices (appreciation of the exchange rate and cheaper imports)
The indirect co-product effect Around 2010 we observe a decline in the share of crude allocated to gasoline consumption but an increase in the share allocated to diesel We also observe a change in the petroleum output mix from 2002 to 2010, as predicted by the conceptual model
Greenhouse gases Using EIA GHG numbers, the effect of ethanol on the environment is small resulting in a reduction of about 40 million metric tonnes of CO2. However, if gasoline was displaced with a carbon neutral product, then the stock of CO2 in our atmosphere would have declined by 306 million metric tonnes of CO2
“The war on coal” How unique is the biofuel story President Obama needs to recognize that maintaining reliable and affordable energy is not something that just happens. When a switch is flipped, rarely do we stop and consider the tremendous amount of hard work and ingenuity that was required to light up a room or power equipment. [Bob Gibbs (R-Ohio)] “The regulations the President wants to force on coal are not feasible. And if it’s not feasible, it’s not reasonable … It’s clear now that the President has declared a war on coal. It’s simply unacceptable that one of the key elements of his climate change proposal places regulations on coal that are completely impossible to meet with existing technology.” [Joe Manchin (D-West Virginia]
GHG in the US declined, but the US exported GHG to the rest of the world
Concerns with climate change led to policy and search for alternatives to existing fossil fuels. These policies and alternatives yielded a big impact on the US balance of trade, but only a limited impact on the environment.
