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The Economics of Biofuel Essay

This paper will briefly deal with the economic impact of the new field of biofuels. It will deal with its increasing viability and the diversity of new sources of energy. The American government’s substantial support of this new sector, as well as its tremendous impact on agricultural markets. This paper will show that this industry is only just beginning, with tremendous potential to revolutionize the American economy and the way Americans view both agriculture and fuel.

It is an industry where the United Stats may regain its technical edge over its international competitors as well as eliminate the proverbial dependence of the US consumer on crude oil. I. The Viability of Biofuel Production The viability of Biofuel production in the United States Is a hotly debated topic. The basic structure of the discussion in economic terms is one of efficiency. Many hold that biofuels, at the moment, are a non-viable source of energy. This is because, so the argument goes, that ethanol cannot possibly provide for even a substantial fraction of American energy needs.

That it is a high input crop that would take away from research and labor on basic food sources. It would drive food sources sky high. Secondly, the

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argument is that the biofuel industry is not viable in that it uses as much energy in the creation of ethanol as it produces (Maryland, 1). These arguments are very powerful, and have forced researchers to develop alternatives to corn-based biofuels. One such method is the development of fuels out of algae. There are several reasons to hope that this particular fuel source can contribute mightily where corn cannot. First, it does not displace food crops.

It is grown in water. Second, little energy is needed to grow it, so the fuel argument is cast aside. This algae contains little cellulose, hence, it taken little effort to break it down, and it has already proven itself to be a strong competitor to corn in the alterative fuels movement. Poplar trees have also shown themselves to be an excellent compliment to both corn and algae in developing alterative fuels. Poplar trees are fed with refined sewer waste. The trees absorb almost the entirely of the waste, leading to healthy trees that also act as a pollution filter.

Further, they can be grown on land that is not suitable for food production. Many believe that poplar groves are part of the future of American biofuel production. Again, another source for hope in this area is soybeans that are genetically engineered. Many researchers have developed a strain of soybean that has a high oil content that produces far more fuel than the average, untreated bean. Hence, these newer developments in the fuel industry have made this industry far more realistic than earlier attempts that rely almost exclusively on corn.

And while they do not compete with corn, they compliment it, creating a strongly diverse set of new industries that are giving new life to alternative fuels. In terms of basic macroeconomic affects, Shapouri (2007) has made the claim that this can create a new reason for the American agricultural sector to expand. That a revitalized alternative energy sector might be able to replace Russia with the US in terms of providing energy to the pacific Rim countries, where today, Russia is sending much of their oil to these consumers.

It is a major boost to the American agricultural sector that now it is entering the energy field with all that it implies: a higher consumer base, a new set of applications for high technology research, higher profits bringing more and more people into the field, as well as the important side affect of revitalizing small towns and rural America after a century long period of decline. II. US Policies Supporting Biofuel Production The American government has a long history of supporting biofuel production, disproving the long held myth that the US government is in the grip of oil firms.

The structure of American support for such initiatives begins in earnest in 1978, in the midst of a major oil price shock, where the first tax is included on gasoline with the express purpose to support ethanol production (Koplow, 2006, 8). In 1980, still reeling from the shock, the outgoing Carter administration places a “Windfall Profits” tax in the oil industry, again with the express purpose of not only supporting the biofuel industry, but also to finance research into the development of more fuel efficient cars and trucks.

From the early 1980s onward, there has been a structural component to the development of the biofuel industry in terms of state support, Tax credits during te Regan administration have been given to new, start-up biofuel companies and research institutes. In 1985, 29 states had a subsidy program for the development of ethanol and other biofuels, today that number is almost 40, that in addition to the subsidies and tax credits given to the industry (Koplow, 2008, 16-17).

In 1990, the Bush administration extended the Ethanol Producer Tax Credit to provide even more tax breaks for those industries who will branch out into the still infantile alternative fuels movement. The credit was also extended to new businesses in that field. Between 1978 and 1998 (in today’s dollars), the amount of investment, that is, direct federal cash flow, to the alternative fuels business wavered between $50 million and $100 million dollars, though it should be added that such subsidies were only the direct variety: the bulk of federal investment took the form of indirect investment and subsidy (Koplow, 18).

But the most substantial federal investment in this industry came under the second bush administration, where the Energy Policy Act of 2005 mandated federal purchases of biofuels for federal use. Furthermore, this act mandated purchases even outside of federal vehicle uses in that it was meant to artificially keep prices high so as to attract more private initiatives into this industry. Even more, later amendments to this act permitted the placement of high tariffs on foreign competitors to American bio-fuels, especially Brazil, whose large soybean crops competed with the American industry (Koplow, 19).

Hence, there were now two structural elements in the pricing of alternative fuels: mandated purchases and mandated tariffs on foreign competition. Ultimately, groups such as the International Institute for Sustainable Development object to the huge level of subsidization to alterative fuels producers in the 2000s, reaching almost 90 billion dollars, taking all forms of subsidy into account (IISD, 2008). In many cases, such an indulgent attitude is relieving corporations in the field of environmental protections, which are a major hazard in biofuel production.

In other words, as IISD researcher Mark Halle writes “. . . we urge the US government to resist special interest lobbying and to promote policies based on economic and environmental merits” (IISD, 2008). In other words, in the flurry of new research on biofuel production and distribution, a new set of corporate movers has developed, creating distortions in the market by manipulating state support. III. Impact on Land Use and US Agricultural Markets By far the most interesting element of the biofuels industry is its capacity to re-create and revitalize the American agricultural scene.

The work of both Crooks (1997) and Hofstrand have reached this conclusion. The best news in a long time concerning the agricultural markets in America is that, since the 1990s increase in federal investment, the agricultural sector in the United States has shifted from a tremendous surplus to a deficit. In real terms, this is a boon for the industry. Biofuels has already recreated the agricultural map, and has lured more and more private investors into the area.

Hofstrand does hold, in contradistinction to that of most others that corn can, if genetically altered, provide the for the bulk of America’s energy needs without vitiating the promise of other sectors such as food production or livestock. All the industry required are more inputs in terms of research, specifically genetic research to create a corn crop that is heavy in oil and whose cellulose content is lower than today, so less effort is necessary to break the corn down into ethanol. Several things develop from his research: first of all, increasing corn yields can easily be done.

Tile drainage and higher prices will both make corn growing more efficient as well as attract more research dollars from the private sector. The idea, secondly, is that higher corn prices signals the market to raise prices on food products. As corn takes more and more American farmland (which, as of 2009, is mostly fallow) for itself, it forces the prices of other crops upward. Partially, this is because land prices have increased, and will increase more and more s corn is planted to feed the ethanol demand.

The only real problem in terms of proving is its affect on feed prices, shooting meat and poultry prices higher and higher. The American meat and poultry market is relatively inelastic, and hence, increases in prices might meant more overall debt for the American consumer. In conclusion, the biofuel industry has tremendous potential. Private and public sector investment have made the industry viable, though, for better or worse, substantial federal and state interference n the industry has distorted prices, keeping them artificially high.

Nevertheless, they hold the possibility of cheap, reusable fuel from domestic sources and the revitalization of American agriculture. References Hofstrand, Donald. (nd). “The Impact of Biofuels on Agriculture. ” The Agricultural Marketing Resource Center. (http://www. agmrc. org/renewable_energy/biofuelsbiorefining_general/the_impact_of_biofuels_on_agriculture. cfm) Crooks, Anthony (1997) “Cooperatives and New Uses for Agricultural Products: An Assessment of the Fuel Ethanol Industry. ” Washington D. C. Rural Business Cooperation Service. USDA. Koplow, Douglas. (2006).

“Government Support for Ethanol and Bio-diesel in the United States. ” Biofuels: At What Cost? Geneva, Switzerland: Global Subsidies Initiative. “Viability Studies on Biofuels. ” Research at the University of Maryland. (www. umresearch. umd. edu/VPRPubs/Bio%20Fuel%20Viability. pdf) Shapouri, Hosein. (2007). “The Viability of Alternative Energy Sources. ” USDA: Office of Energy Policy White Paper. Dunbar, Daimon. (2008). “New US Agricultural Secretary Urged to Give Priority to the Reform Bio-Fuel Production. ” International Institute for Sustainable Development. (http://www. iisd. org/media/2008/dec_18_2008. asp)

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