Summary:

The McKinsey Quarterly is circulating a chart-filled newsletter this morning, highlighting four sticking points that will determine the future success or failure of the biofuel industry. The data is from a report the research firm released earlier this year, but it’s still timely, and we thought […]

The McKinsey Quarterly is circulating a chart-filled newsletter this morning, highlighting four sticking points that will determine the future success or failure of the biofuel industry. The data is from a report the research firm released earlier this year, but it’s still timely, and we thought we’d give you an overview on their findings. While a lot of this is common sense, it’s convenient to have it all wrapped up in one place, and with nifty infographics:
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1).The Cost and Availability of the Feedstock: If you were ever confused as to why corn prices are sending ethanol producers into a tizzy, check out these stats. As the report notes, feedstocks currently account for between 50 and 80 percent of biofuel production costs, and with every one dollar increase in the price of a bushel of corn in the U.S., the production cost of ethanol rises by 35 cents a gallon. That reduces the producer’s operating margin by 20 percent. Happy times. The report also says that from 2003 to 2006, the percent of the total U.S. corn harvest used for biofuels rose to 16 percent from 12 percent. But in order to meet the government’s goal of 35 billion gallons of biofuels a year by 2017, to meet just half of that target it would need to account for 40 percent of that year’s harvest.

2).Government Regulation: The report says that regulation could be the greatest uncertainty of all, as states and federal government are still determining their energy legislation. Currently in flux is the question of different states mandating different percentages to blend biofuels with traditional fuels. One way or another, fewer subsidies means fewer profits.

3).Conversion Technologies: Cellulosic ethanol produced via microorganisms is the most talked about next-generation biofuel technology, and new technologies will compete for dominance over the next few years. Since cellulose is found easily in energy crops and plant waste, if we can crack the code of cellulosic conversion, feedstocks will get cheaper. Since different geographies have different cellulosic feedstock specialties, the best technology could also give weight to one region (U.S., Europe, Brazil, China) over another.

4).Fuel Prices: See graph below.

mckinseyquarterlyfuelprices1.jpg

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