Economics of biofuels for the transport sector in South Africa

Abstract

Transport is the highest-cost component of the South African economy and road transport dominates it. Road transport energy is provided by diesel and petrol, of which 60 % is sourced from imported crude oil, the rest from a once unique and still world-leading synthetic fuels (synfuels) industry that converts local coal and natural gas into liquid fuels. South Africa grows maize and sugar crops in excess of local needs, so is well positioned to produce bio-ethanol. Bio-ethanol can replace petrol from imported crude oil and save valuable foreign exchange, contribute to the local economy, generate or save jobs and enhance energy security. The South African approach is based on a proposed 10 % blend of ethanol into the petrol pool of about 11 billion litres. High oil prices and the need to reduce greenhouse gas emissions make investment in biofuels desirable. This article examines the economics of investments in liquid biofuel production, both from a national interest and a commercial perspective. It concludes that fuel bio-ethanol investment is desirable from a national economic perspective and thus fiscal support is justified. Support is necessary to cater for low oil price scenarios and to warrant commercial investment. The government needs to balance the needs of investors and feedstock crop-growers with those of the public, in particular the fuel consumers, by providing the right level of support. Given future price uncertainties, finding this right level of support is likely to be an ongoing process.