Full Title: The Supply Risks and Resilience of Biofuels
Author(s): Hamed Ghoddusi, Daniel Cross-Call, Jessika E. Trancik
Publisher(s): Delft University of Technology
Publication Date: June 1, 2012
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Description (excerpt):
Biofuels have been evaluated based on their greenhouse gas emissions, costs, and potential scale of production. Here we argue that the resilience against supply risks should be considered in addition to these previously-proposed metrics for evaluating the scalability potential of transportation biofuels1. Biofuels rely on agricultural production as their key input, which is subject to various risks. A risky supply in conjunction with a highly inelastic demand for transportation fuels can cause price fluctuations, profit volatility, and quantitative shortages which imply negative consequences for biofuels firms, the biofuels industry, and consumers. Thus, it is an important issue both at the firm level as well as from a public policy point of view. We decompose biofuels feedstock risks into supply shocks (due to random events) and competing demand shocks (a function of demand for food crops which is partially unpredictable) and show that the historical yields and production of major crops used in the biofuels industry show a significant level of volatility. We compare first and second generation biofuels and then discuss various strategies for reducing the supply risks of biofuels. We relate the resilience of the biofuels supply chain to scale, technological specifications, input and output market structure, and contractual setups. Our framework is applied to the case of biofuels; however, it provides general insights and analytical frameworks to analyze the scalability potential of other emerging technologies.