Some New Ethanol Technology: Cost Competition and Adoption Effects in the Petroleum Market

Paul Gallagher and Donald Johnson

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This study examines the adoption prospects and market effects for fuels made from agricultural materials. New ethanol processing methods may eventually enable ethanol production from cellulose materials. A cost analysis suggests that corn residue-based production could be competitive with petroleum- based gasoline because land-cost recovery is unnecessary. A supply analysis for U.S. corn residue accounts for potential livestock use and environmental factors. Some simulations are based on a petroleum market model , the residue supply estimate , and adoption of the new ethanol processing technology; results suggest a petroleum price reduction. The benefit-cost analysis for this technology accounts for the oligopoly-offsetting effect of additional supplies and the option value for loss reductions in the event of an embargo. Substantial underestimates of the technology benefit will occur unless the chance of embargo and oligopoly pricing are taken into account.

Date: 1999-01-01
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