1. Key Drivers in the Biofuels Picture for the Near Future Wally Tyner

2. Major Drivers World oil price Government policy Ethanol prices Corn prices Advances in cellulose technology Greenhouse gas policies Impacts on the rest of the world

3. World Oil Prices Oil price today is hovering around $90/bbl. The oil price is heavily demand driven If we were to have a global recession, oil demand would fall, and, consequently oil price would fall as well –We could easily see $40 oil again The downside price risk makes investment in renewable energy alternatives quite risky

4. Government Policy Ethanol has always been an industry driven by government policy –In fact, the current ethanol boom may be considered an unintended consequence of the fixed government subsidy keyed to $20 oil, when oil jumped to $60 Future government policy could be a continuation of subsidies, renewable fuel mandates, links to GHG policies, or other options The form policy takes will help drive the future

5. Ethanol Price Historically, ethanol has had value as an additive because of its higher octane and higher oxygen content But with the growth in ethanol production, the additive market has been saturated such that future ethanol prices will be driven by ethanol energy content relative to gasoline plus subsidies

6. Current Ethanol Prices At present, ethanol is priced even below its energy plus subsidy value. There are significant infrastructure issues keeping the ethanol price down: –There is inadequate transport to get the ethanol from the Mid-west to markets in the East, South, and West –Inadequate blending facilities at markets –Less of an issue for Montana

7. Current Gasoline Prices At present, gasoline prices are not conforming to long term expectations. The long term relationship is –P g ($/gal.) =.1076 +.0313 * P o ($/bbl.) –With $90 oil, gasoline should be about $2.92 wholesale or $3.59 retail. It is much less. –October is normally a low demand period with lower gasoline prices. This year, oil is up for geopolitical reasons, so refinery margins have been squeezed. This is unlikely to continue.

8. Gasoline and Ethanol Prices At present gasoline prices are about 54 cents per gallon below normal for $90 crude. At present, ethanol prices are about 29 cents per gallon lower than even current gasoline prices would predict. So there is about a $0.83 per gallon divergence between the ethanol price one would normally expect with $90 crude and 51 cent subsidy and the current price. When and to what extent will this divergence end?

9. Corn Prices Corn futures prices are above $4 for most of 2008 and 2009. We have entered a new era in which agricultural commodity prices will be driven like never before by oil prices. Oil prices will set both the floor and the ceiling for corn prices.

10. Cellulose Technology Today, it costs the equivalent of about $103/bbl. to produce ethanol from cellulose. How fast and how far we go with cellulose ethanol will depend on the degree of success in developing more efficient and cost effective technologies. We will also have to have policies in place that will permit and encourage the bridge to cellulose.

11. Climate Change Policy How the US approaches climate change policy also will have an impact on where and how far biofuels goes. Cellulose ethanol is far more effective in reducing greenhouse gasses than corn based ethanol Either through “cap and trade” or through biofuels policies that link incentives to the extent of GHG reduction, we can stimulate cellulose ethanol.

13. Global Impacts We do not today understand the global impacts of rich country subsidies for renewable fuels The World Bank says 70% of the worlds poor live in rural areas in developing countries and derive their primary livelihood from agriculture. –They could be better off. –But net food buyers will be worse off The question is very complicated.

14. Summing Up Today’s high oil prices are largely demand driven Global recession could lead to significant oil price drops Investments in alternative energy sources are risky in the face of future potential price falls without policy measures that insure against major price drops If we want to reduce dependence on foreign oil, we must develop policy pathways that will lead us towards greater reliance on alternative energy and provide a policy bridge to cellulose based ethanol The policy choices we make will be critical

15. Thanks very much! Questions and Comments For more information: http://www.ces.purdue.edu/bioenergy http://www.agecon.purdue.edu/papers/