Tuesday, July 10, 2007

Biofuels-- Agrofuels. Whats in a name?

Today, I thought I would enter the biofuels debate. After all, every Tom, Dick and Harry wants to enter the debate. So why not Balasubramanian?
Biofuels are the common name given to anything that provides energy that comes from agricultural sources. This could be ethanol, power produced from bagasse, jatropha seed juice, even methane from cowdung.
So why is everyone interested in it now though? After all, these things have been around since the dawn of time, practically. Heck, I remember watching programs on biogas when I was a kid, and Doordarshan was the only Channel available!
Well, the answer is simple. 10 years ago, a barrel of crude oil used to cost $12-14. Today, it is about $76. Economics says that if prices go up, demand for the product goes down. But Oil is a strange commodity. Like food, the modern world cant seem to live without it. Thus, a situation in economics called inelastic demand sets in, where demand is somewhat independent of price. But even though the demand stays constant, now there is a desire for substitute sources. And this is where biofuels comes in.
Burning Ethanol in the car engine has been around since Gerald Ford made the first Model T. After all, it was a car designed to run on alcohol. But who would like to go through the lengthy process of growing a crop, and then waiting for it to grow, and finally produce alcohol fuel, when you get high grade petroleum oil practically coming out of the ground for free! So alcohol was abandoned. But when oil hit $50 a barrel, the interest was rekindled. After all, the cost of sugarcane is not too much, and alcohol could now be substituted. And besides, after all the hoopla about green energy and global warming, producers can get labelled as good guys even while they rake in the money!
But can there ever be a perfect deal? Unfortunately no! What you gain on the swings, you lose on the roundabouts. Ethanol is produced from three major crops; sugarcane, corn and sugar beet. But sugarcane requires fertile and irrigated land. And even if we take the entire cropland in the world and grow sugarcane on it, we probably would not be making enough ethanol to supply our needs. At best, ethanol is a partial substitute. Also, the diversion of land from food crops to sugarcane leads to a situation where food prices will become a serious problem. This is especially because the crop is grown in countries which are not precisely rich; Brazil, India, Africa, and the likes.
So the lobby against biofuels is slowly building itself up. But this is a debate that will probably be decided by the Financial officers and the bean counters at an office rather than in the streets and farms. But the end result may well be seen in the economics classrooms when people discuss case studies on substitute products!

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