Transcript View Conference Presentation - United States Association for

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
Supply of coal and natural
gas for electricity in the US
25000
20000
15000
Electric Power: natural gas
10000
5000
0
Electric Power Sector: coal
Coal net exports
30000
1500
1000
25000
500
0
MMBtu
20000
15000
10000
-500
-1000
-1500
-2000
-2500
5000
-3000
-3500
0
-4000
Total coal and NG MMBtu supply
Net MMBtu export
GHG in the US declined, but the US exported
GHG to the rest of the world
Annual energy-related carbon emissions
4000
metric tons of carbon dioxide
3500
3000
2500
2000
coal
natural gas
1500
1000
500
0
coal and NG
In conclusion:
Before the introduction of
the alternative
In conclusion:
After the introduction of the
alternative
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.