The Cost of Biofuels

Pinning down the cost of any particular biofuel is difficult because prices vary with type of feedstock, production volume, production process, government incentives, food prices, and more.  Prices also vary from country to country, just as they do with petroleum. Nevertheless, a general idea of how biofuels compare to petroleum in terms of cost can be determined.

In general, most countries look to keep the “price at the pump” of biofuels at or near the price of petroleum fuels. Interestingly, maintaining costs was not possible until recently when the price of fossil fuels rose dramatically. Only in the last decade or two as the price of fossil fuels has risen enough to make alternatives attractive. Even with the rise in fossil fuel prices, government subsidy is often necessary to make biofuels fully competitive.

EIA Estimates

The United States department of Energy controls a division known as the Energy Information Administration (EIA). Part of their mandate is to quantify the costs of energy and recommend policy actions that can help to mitigate costs and ensure the market remains fair. The EIA uses a “process-costing” approach to model the price of biofuels. This approach takes into account the net costs of feedstock production as well as capital and operating costs for the production of fuel.

For soybean oil that is converted to biodiesel, the EIA estimates that the cost for 2012/1013 will be about $2.06 per gallon if 50 million gallons are produced about $2.47 per gallon if 200 million gallons are produced. The discrepancy in price due to scale arises from the fact that increased demand for soybean oil to produce biodiesel drives up the price of the feedstock. In either case, biodiesel tends to be more affordable than petrodiesel.

A similar story exists for ethanol. Ethanol is the primary biofuel produced in the United States and, as such, is heavily subsidized. Even with a subsidy, however, the cost of ethanol has increased almost every year since 2003, in part because of the increased demand due to federal requirements for E10 gasoline. With a tax credit, ethanol costs roughly the same as gasoline per gallon. Without the tax credit, ethanol can cost upwards of 20-30% more per gallon than gasoline.

Crop Variability

One of the problems with biofuels that has not, historically, been a problem with fossil fuels is fluctuation in feedstock. Until recently, petroleum exploration and extraction was on the rise and while it may be at or near the peak, so far supply has been generally stable (there are some exceptions) and so prices have been relatively stable as well (once again, this is something that is changing as production reaches its peak but demand continues to increase). Biofuels are not likely to have the same stability because crops, even relatively hardy crops like Jatropha, are subject to environmental pressures like sunlight, temperature, parasites, nutrient availability and so forth. The only feedstock that is likely to provide any stability is algae. So, the prices of biofuels are likely to be more prone to fluctuation than petroleum has historically been.

Research and Development

Another factor that influences the price of biofuels is the cost of research and development. While simple production methods have been around for decades or even more than a century, creating advanced biofuels that rely on special crops and which are less harmful to the environment is a real challenge. Billions of dollars have been invested into getting the fledgling industry off of the ground and that doesn’t even come close to the costs that will be associated with developing full-scale production and distribution infrastructure.

Current Prices

According to the U.S. Department of Energy, the current prices of several biofuels, as of October 2012, were as follows:

National Average Price for the United States (Sept. 28 2012 - October 12, 2012)

Fuel

Price

B20

$4.18

B99-B100

$4.39

E85

$3.47

Gasoline

$3.82

Diesel

$4.13

Adapted from: http://www.afdc.energy.gov/fuels/prices.html