Anhydrous Ethanol Pricing in Economies with an Underdeveloped Biofuels Market: The Case of Mexico

Abstract

Most gasoline currently consumed in Mexico continues to be oxygenated with Methyl Tert-Butyl Ether (MTBE) despite its proven effects on the environment and human health. Hence, the existence of a regulatory framework on biofuels and various institutional efforts have not been sufficient to develop a national market for anhydrous ethanol use as biofuel. The goal of this research is twofold: one, to review and analyze the governmental actions taken to incorporate bioethanol as a gasoline oxygenate, and, two, to design a tool to estimate the bioethanol price at the Storage and Distribution Terminals of PEMEX (Mexico’s state-owned oil company). A price estimation model for bioethanol was developed through the microeconomic theory of the producer and the indifference price of a product methodology, which calculates the daily price of ethanol in the period 2015–2022; additionally, an MS Excel-based support tool was created for this analysis (namely: the Price-CEM). The analysis showed that incorporating bioethanol into the Mexican energy matrix would require policies of fiscal support for R&D, agricultural waste management and bioethanol production, as well as a new regulatory framework to both gradually eliminate MTBE and establish bioethanol/gasoline blending targets. Furthermore, institutional efforts would also be required to integrate all links in the biofuel production chain, including primary feedstock producers. The cost estimation method and tool have also shown to be valuable instruments to calculate both the prices at which a local bioethanol market would be competitive (with respect to the international market) and the most important cost contributions for local supply chains. This is the first tool to estimate the price of anhydrous ethanol at the local level, which can contribute to identifying opportunities and economic thresholds for the successful development of feasible bioethanol markets in Mexico.