Long-term Biofuel Projections under Different Oil Price Scenarios

With rapid expansion of biofuel production, major concerns have arisen over higher food costs and competition between food, feed, and biofuel for energy-rich commodities. Most projections are based on short- and intermediate-term commodity price shocks. We estimate long-term biofuel demand and cost-minimizing supply functions for feedstock and biofuel in developed and developing countries. We assume input and output coefficients and substitution elasticities adjust over time in response to changing prices in a dynamic market environment with productivity growth. Three alternative oil price scenarios are considered for biofuel feedstock production and conversation. The price of oil puts both a floor and ceiling on feedstock price. We conclude that global biofuel expansion will be limited in the absence of government incentives and mandates, unless high real oil prices prevail. Countries and regions need large, excess feedstock supplies (price-elastic response) if biofuel expansion is to be competitive with oil or other liquid fuels.