As you know, I am working with a group to develop an energy beet-to-biofuel industry in North Dakota. The goal is to construct 12 plants that produce 20 million gallons each for an annual state production of 240 million gallons. The first law of economics is that supply equals demand. Thus, if North Dakota has supply, will consumers purchase this level of energy beet biofuel at prices that are profitable for the plant?
The results of a study presented at the 2011 American Economic Association annual meeting shed some interesting light on the subject. The study’s authors, Alberto Salvo and Christian Huse of Northwestern University and Stockholm School of Economics, respectively, conducted a study of gasoline and sugarcane ethanol buyers in Brazil. Since ethanol derived from energy beets will be very similar to that produced from sugarcane, I think the findings are insightful.
In Brazil, car owners can select any proportion of gasoline or sugarcane ethanol to fill their tank. Sugarcane is widely available across the country and consumers are familiar with the advantages of both products. Salvo and Huse were interested in finding out what price differential between gasoline and sugarcane ethanol would get consumers to switch products.
The study was conducted by monitoring drivers’ fuel purchases without the customers knowing they were being observed. Once the buyers had completed their purchase, they were approached and asked several questions about themselves, their vehicle and why they selected the proportion of gasoline or sugarcane ethanol they wanted. The researchers then developed a statistical analysis to determine the importance of each characteristic.
What surprised the researchers was the number of consumers who steadfastly purchased gasoline or sugarcane ethanol regardless of price. There were approximately 20 percent of consumers on each end of the continuum who routinely purchased gasoline or ethanol even if it was far more expensive than the alternative. Buyers who purchased gasoline, regardless of price, were statistically older, drove heavier cars, had larger engines in their vehicles and commuted longer distances. In conversations afterward, one of the main concerns with sugarcane ethanol was its reduced mileage. Thus, since their cars were larger and they drove more, they found frequent refueling to be inconvenient.
Another interesting finding relates to the availability of flex-fuel cars. Flex-fuel vehicles are far more prevalent in Brazil than in the U.S. However, the majority of Brazilians do not yet own these models. Thus, they are constrained to purchasing gasoline, even when the alternative is cheaper.
What were the reasons purchasers of sugarcane ethanol routinely bought that product regardless of price? One of the choices they could have selected was that sugarcane ethanol was environmentally friendly. Turns out this consideration was not a strong motivating factor leading to repetitive purchases. The most significant factor was that sugarcane ethanol is produced in their region and they were supporting a local industry.
The remaining 60 percent of consumers were sensitive to prices and purchased a product based on economics.
The implication of this research is that 20 percent of consumers will eagerly await the opportunity to purchase energy beet biofuel. Sixty percent are price sensitive and will wait to compare energy beet biofuel prices with gasoline. The remaining 20 percent of consumers are going to be resistant energy beet biofuel shoppers.