The oil crises in the 1970s awakened oil-importing countries to their dependency on oil-rich nations. Increasing energy demand, together with finite stock of fossil fuels, has resulted in rising oil prices over time. Since a good deal of global oil pro­duction occurs in politically unstable regions, thereby resulting in recurrent shocks, price spikes and general volatility, concerns about national security have escalated during an era of increasing energy demand (Council of Economic Advisers 2008). From an economic perspective, the pursuit of energy security can be related to a number of possible market failures, including the power of OPEC and the unequal distribution of oil wealth around the globe. This results in insufficient competi­tive conditions, which led to sub-optimal resource allocation (Tsui 2011). From a national perspective, the energy security argument ascribes benefits to reducing oil imports (Delucchi and Murphy 2008; Lapan and Moschini 2012). For example, the hidden cost of oil dependence for the United States is estimated to be about USD 3 per gallon of conventional liquid fuel (Copulos 2007). This cost includes incremen­tal military costs, supply disruption costs and direct economic costs.

Given that the existing mobile energy paradigm relies heavily on liquid fuels, this means, especially in the developed world, exchanging increasingly price-vol­atile hydrocarbon-based liquids fuels for a proportion of biofuels, the feedstock of which can be grown domestically, or at least sourced from comparatively sta­ble economies. An important issue is that biofuels are generally blended with hydrocarbon-based fuels. In effect, biofuels, especially land — and labour-intensive first-generation biofuels, cannot replace hydrocarbon-based liquid fuels on a one — for-one basis, yet they can extend remaining petroleum supplies and, at a general level, the infrastructure that uses them. But this means that liquid fuels in countries desirous of enhancing their energy security will not be able to divorce themselves completely from the global oil price. Hence, the use of biofuels merely improves energy security, but does not result in independence from fossil fuels.

It is necessary to understand the link between energy (i. e. oil and biofuels) and agricultural commodity markets to analyse how biofuels, especially first-genera­tion biofuels, could meet the stated national energy security objective when using feedstock optimized for food production, rather than for energy production. Given that agriculture is an energy-intensive sector, one can draw a direct linkage from oil prices to agricultural commodity prices. The emergence of biofuel markets has raised another linkage between oil prices, biofuel prices and the prices of feedstock crops (and the prices of agricultural commodities in the end).[5] Biofuels have a direct effect on the agricultural sector because they use biomass as an input that, together with agricultural commodities, is produced on a fixed area of agricultural land. The increase of agricultural commodity prices could be significant owing to price inelasticities of food demand and land supply. For example, markets for corn, wheat and rice in the United States, the world’s reserve supplier of grains, saw a drastic increase in related food prices (AgMRC 2009). Corn prices rose from USD 2.20 per bushel in 2006 to above USD 5.20 per bushel in 2007 and reached a high of USD 7.60 per bushel in the summer of 2008. A casual observation also suggests a direct link between these price rises and biofuel output.

However, the potential impact of the expansion of first-generation biofuel pro­duction on food crop prices remains controversial. Some argue that biofuel produc­tion has an adverse impact on food prices and poverty, especially in developing countries (Runge and Senauer 2007; Mitchell 2008). The World Bank has shown that up to 75 % of the increase in food prices could result from biofuel expansion (Mitchell 2008), while the IMF estimated that the increased demand for biofu­els accounted for 70 % of the increase in corn prices and 40 % of the increase in soybean prices (Lipsky 2008). Likewise, the FAO (2008) and the OECD (2009) have argued that biofuel expansion was a substantial factor in causing food price rises. Yet some, like Hassouneh et al. (2011), Mallory et al. (2012) and Du and McPhail (2012), have played this down. Indeed, according to the USDA, the bio­mass demand for biofuels has little impact on food commodity prices (i. e. biofuel production generating only 3 % of the 40 % rise in global food prices) (Reuters 2008). Similarly, the European Commission (2008) argues that the impact of bio­fuel on food crop prices is likely to be very small. Alexandratos (2008) found that increases in the demand for food in emerging countries, particularly China and India, together with weather issues, poor harvests, speculation and financial crises, are the dominant factors behind demand shocks. Yet he acknowledges that the addi­tion of biofuels results in food crop demand growing faster than in the past, which could prevent the current commodity prices trending back towards pre-surge levels.

According to the theoretical framework developed by Gardner (2007), de Gorter and Just (2008b, 2009a), together with empirical work by Ciaian and Kancs (2011), increased bioethanol production results in increasing corn prices, which in turn sub­stantially increases bioethanol prices. Yet an increase in bioethanol prices does increase the price of corn and of other crops because corn competes for land with other crops, while other crops are substitutes in consumption. Thus, the circular impact of high corn and bioethanol prices continues until the opportunity cost of corn for other uses is above the marginal benefit derived from converting corn to bioetha­nol when high-cost biofuel feedstocks are present. Above this point, bioethanol would cease to be produced unless there are substantial production subsidies. The ineffi­ciency of production subsidies owing to high taxpayers’ costs and the cost of interac­tion effects between existing policies (de Gorter and Just 2009a, 2010) implies that, with rising feedstock prices over time, no additional bioethanol would be produced in the longer term when subsidies are no longer enough to induce production. Indeed, a direct link between rising agricultural commodities prices and biofuel output raises concerns about the viability of biofuel production at a scale sufficient to replace a sig­nificant proportion of a nation’s use of petroleum. This is because biofuel production and costs are uncertain and vary with the feedstock available, together with price vola­tility. This is especially the case when feedstocks need to be imported.

U. S. Imported Crude Oil

Price

$/barrel

=== U. S. Diesel Fuel Price $/gallon

= =U. S. Gasoline Price $/gallon

——— Iowa Corn Price

$/bu

…….. Iowa Soybean Price

$/bu

— — .Iowa Ethanol Price $/gallon

The limitation of direct food-versus-fuel competition therefore favours the development of later-generation biofuels derived from non-edible biomass. Although these biofuels have addressed some of the problems associated with first-generation biofuels, the issues of competing land use and required land-use changes with regard to second-generation biofuels’ feedstock production are still relevant (Brennan and Owende 2010). Since food demand and land supply are price inelastic, the price increase of agricultural commodities owing to competi­tion with second-generation biofuels’ feedstock production may still be substan­tial. Figures 2 and 3 show the price trends of agricultural commodities and energy in the United States and at a global level, respectively. Prices of agricultural com­modities have been volatile and are rising over time. Although the surge in the sugar price during 2010-2011 stemmed from weather shocks and poor yields in the two largest sugarcane-producing nations (NREL 2013), i. e. Brazil and India, sugarcane-based bioethanol production was arguably another contributing factor (Alexandratos 2008). At a global level, the prices of palm oil and soybean are even more volatile. The explanation could be that both palm oil and soybean are not only used as feedstocks for biodiesel, but also are in demand for other purposes.

Furthermore, the trends of these agricultural prices are very much similar to those of energy prices, and crude oil prices in particular. The link between crude

Crude Oil, OK WTI Spot Price FOB (Dollars per Barrel)

oil prices and those of agricultural products works via the following: (a) the effects of crude oil prices on agricultural commodity production costs given agriculture’s heavy reliance on energy-intensive inputs (fertilizer, fuel and, in irrigated agri­culture, electricity) and (b) the macroeconomic effects of crude oil prices, e. g. on inflation, incomes, interest rates, exchange rates and foreign trade, all of which have impacts on the agricultural commodity demand-supply balance affecting the prices (Alexandratos 2008). The implication from Mitchell’s estimates (2008) is that the increased petroleum costs caused food prices to increase by 15-20 %. Thus, the use of pro-biofuel policies to improve national energy security becomes questionable. This is because a nation cannot entirely escape from oil price volatil­ity by moving to biofuels derived from edible crops because these remain linked to global oil prices. The difficulty of escaping from oil price volatility is exacer­bated with first-generation biofuels, but also might apply when a market is cre­ated for non-edible feedstocks, the production of which will also, in some cases, be affected by crude oil prices. Although later-generation biofuels could limit mar­ket distortions relating to the direct food-versus-biofuel competition, they may not escape volatility relating to fossil fuel prices. This would especially be the case for grass crops, but perhaps not for milling residue.