Group for Research in Decision Analysis

Energy Security Concerns of Biofuels

Hamed Ghoddusi Vienna Graduate School of Finance, Austria

We argue that supply risks, a major energy security indicator, should be considered in addition to previously-proposed metrics for evaluating the performance and scalability potential of transportation biofuels. Biofuels rely on agricultural production as their key input, which is subject to various exogenous shocks. A risky feedstock supply in conjunction with a highly inelastic demand for transportation fuels can cause substantial price fluctuations and quantitative shortages, with negative welfare costs. We provide estimates for the welfare costs of volatile feedstock yields and review possible strategies for risk mitigation. We then discuss the performance of various diversification strategies in reducing the overall riskiness of biofuels.