Energy in 2020: Assessing the Economic Efects of Commercialization of Cellulosic Ethanol by Stefan Osborne Ofce of Competition and Economic Analysis Executive Summary • Te primary benefciaries of commercially viable cellulosic ethanol production would be U.S. dependence on imports of crude oil has crop-producing U.S. industries and their sup- steadily increased for three decades. One way to pliers. Te increase in output over baseline Manufacturing and Services reduce this dependence is to increase domestic projections from these sectors would range production of renewable fuels such as etha- from 2.4 percent to 4.3 percent in 2020. U.S. Competitiveness Report nol. Tis report examines the efect on the U.S. agriculture could gain 20,350 jobs at the ex- November 2007 economy in 2020 if advances in technology allow pense of other sectors. cellulosic ethanol to become commercially viable and if cellulosic ethanol production becomes • Conversely, lower prices for crude oil would adequate to allow total ethanol production to hurt U.S. oil producers, although the motor reach 30 billion gallons (including 10.5 billion fuel producing industry would beneft from gallons of corn-based ethanol). In this report, “oil” lower input prices. and “crude oil” are used interchangeably, unless Two critical factors that infuence our impact otherwise noted. Our fndings, based on produc- assessments are our assumptions on (a) the tion of 19.5 billion gallons of cellulosic ethanol in cost-competitiveness of cellulosic ethanol and (b) 2020, indicate the following: the volume of production of cellulosic ethanol in • Compared with current projections for 2020, 2020. Sensitivity analysis indicates that the U.S. U.S. crude oil imports would be 4.1 percent economy would beneft even if we assume that lower than projected, amounting to a dif- cellulosic ethanol is only cost-competitive when ference of about 460,000 barrels per day. world oil prices are $60 per barrel, rather than Furthermore, the worldwide price of oil and the $50-per-barrel assumption used in the base the domestic U.S. fuel price would be 1.2 per- scenario. Our fndings further suggest that the cent and 2.0 percent, respectively, lower than benefts are roughly proportional to the volume projected. of cellulosic ethanol produced domestically. In a best-case scenario where enough cellulosic • Te annual benefts to U.S. consumers of in- feedstock is available to produce 49.5 billion gal- creased cellulosic ethanol production would lons of cellulosic ethanol in 2020 and the world be $12.6 billion in 2020. Expressed in terms of price of crude oil is $50 per barrel, U.S. crude oil today’s economy, that amount is equivalent to imports in 2020 would be lowered by 1.2 million about 40 percent of the gains in real income barrels per day over baseline projections and U.S. that would accrue to the United States from agriculture would gain 54,000 jobs compared eliminating all restraints on imports. with current baseline projections. Our analysis does not take into account all factors gallons in both cases, with the remaining ethanol determining the costs associated with additional production coming from cellulosic feedstock.2,3 cellulosic ethanol use, such as the transitional Tis report assesses the projected benefts to the investments necessary to replace crude oil with U.S. economy and industries if price and volume ethanol in the U.S. fuel supply. Similarly, this targets are met. report does not address all the economic benefts To assess the economic impacts of meeting those associated with expanded cellulosic ethanol use, targets, we constructed a simplifed facsimile such as reduced greenhouse gas (GHG) emissions of the U.S. economy in 2020. Tis facsimile is resulting from decreased petroleum consump- consistent with forecasts of macroeconomic tion. Given that transition costs are likely to be variables and energy prices released by the incurred only once, whereas the benefts would Energy Information Administration (EIA) An- accrue each year, the value of the stream of nual Energy Outlook 2006 (AEO). Te facsimile benefts from cellulosic ethanol production likely provides a snapshot of how the U.S. economy exceeds the one-time transition costs. would look in 2020 without commercially viable Tis report assesses the impact of cellulosic cellulosic ethanol. We then assumed that 19.5 ethanol production from a U.S. economy-wide billion gallons of cellulosic ethanol could be perspective. Te report uses a computable general produced at the Department of Energy (DOE) equilibrium model that tracks 500 industry sectors. target cost of $1.07 per gallon, so that total ethanol production (corn-based and cellulosic combined) would replace 10 percent of the crude oil inputs Introduction used in gasoline and distillates. Te fndings are presented by comparing the alternate picture of Te United States is importing an increasing the 2020 economy with the EIA’s original or base share of the petroleum that it consumes each projection. Te report also examines a best-case year and world petroleum prices are projected to outlook, in which 49.5 billion gallons of cellu- remain high over the next few decades. Without losic ethanol could be produced in 2020, and an alternative sources of transportation fuel, the U.S. alternate scenario where the $1.07 per gallon cost economy could face adverse economic and politi- target is not met.4 cal consequences. An understanding of the changes likely to occur Few viable alternatives exist for the crude oil in the petroleum and agricultural markets is es- used in transportation fuels. Although ethanol sential to gauge the benefts to the U.S. economy manufactured from corn can be used to replace associated with increased production and use of gasoline, corn-based ethanol can replace only a cellulosic ethanol. Te study begins, therefore, limited amount of U.S. crude oil consumption. with a description of the state of the world market However, much more ethanol could be manufac- for crude oil, including trends that are leading tured from the cellulosic materials in biomass, to higher world prices in the long run. Te study such as crop and forestry residues, energy crops, then explains the diferent methods for reducing and wood wastes. U.S. demand for petroleum, with ethanol as the Because cellulosic ethanol is not yet commercially primary option for directly replacing the petro- viable, the benefts of cellulosic ethanol produc- leum used in vehicle fuel. Te current market for tion can be realized only if its production costs corn-based ethanol and the potential for cel- are reduced. Te magnitude of benefts gained lulosic ethanol production are explained next. will depend on the degree of cost reduction and Te report concludes by describing the projected the volume of cellulosic ethanol produced do- benefts to the U.S. economy if 19.5 billion gallons mestically. Te DOE has set a target for reducing of cellulosic ethanol can be used to replace the cellulosic ethanol’s production costs to $1.07 per petroleum used for vehicle fuel. Efects on specifc gallon by 2012. Available literature indicates that U.S. industries are also highlighted. annual ethanol production (both corn-based and cellulosic) could range from 30 billion gallons to 60 billion gallons in 2020.1 Annual production of corn-based ethanol would be about 10.5 billion 2 U.S. Department of Commerce, International Trade Administration Long-Term Demand Rising; World oil supplies have become tight in recent Prices for Crude Oil Worldwide Will years primarily because of strong demand from Remain High the United States and from developing countries in Asia, including China and India. Te United States Te need to consider alternative fuels like cel- consumes about one-quarter of the world’s petro- lulosic ethanol is driven largely by high crude oil leum production. Developing countries in Asia, prices and energy security. Not only are crude including China and India, have enjoyed strong oil prices relatively high at present, but the EIA recent economic growth and have also become forecasts that crude oil prices will continue to important users of petroleum. According to EIA be high, reaching $50 a barrel (in 2004 prices) in forecasts, daily petroleum consumption by 2030 2020. Te increases in crude oil price will follow will rise by 5.4 million barrels over current levels a decline between 2007 and 2014, when world in the United States and by 13.6 million barrels crude oil prices are forecast to fall to $46.90 per in developing Asian economies. Daily petroleum barrel as new crude oil supplies enter the market consumption will grow by 9.7 million barrels per (see Figure 1). day in the rest of the world by 2030 (see Figure 2). Figure 1. CrudeFigure 1. Crude Oil PriceOil Price ForcastForecast in 2004in 2004 Dollars, Dollars, 2004–20 2004–20 Source:Figure Energy 1. CrudeInformation Oil Administration, Price Forecast Annual in Energy 2004 Outlook Dollars, 2006 (Washington,2004–20 D.C.: U.S. Department of Energy, 2006), availableSource: Energy at www.eia.doe.gov/oiaf/archive/aeo06/pdf/aeotab_12.xls. Information Administration, Annual Energy Outlook 2006 (Washington, D.C.: U.S. Department of Energy, 2006), 70 available at www.eia.doe.gov/oiaf/archive/aeo06/pdf/aeotab_12.xls. 70 60 60 50 50 40 40 dollars per barrel 30 U.S. 30 U.S. dollars per barrel 20 20 10 10 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Energy Information Administration, Annual Energy Outlook 2006 (Washington, D.C.: U.S. Department of Energy, 2006), available at www.eia.doe.gov/oiaf/archive/aeo06/pdf/aeotab_12.xls.