36 sugarcane—technically the most efficient pathway to bioethanol production—have not been favorable (see Figure 2 in Kojima 2013). Despite high world oil prices, ethanol from sugarcane has not been economic since October 2008 (barring February 2013) because world sugar prices have soared. Taking world prices of sugar and gasoline since January 2000, ethanol from sugarcane has been economic only one-sixth of the time. Similarly, the economics of biodiesel have been challenging; the opportunity costs of one of the two principal feedstocks (plant oil, the other feedstock being methanol) have been higher than diesel prices before adding the capital, operating, and maintenance costs for the biodiesel manufacturing plant. The economics of biofuels are location- and feedstock-specific, and are more favorable where the costs of importing oil products are high and domestic production costs of biofuel feedstocks are low, such as a landlocked country importing oil and producing ethanol from molasses, a byproduct of sugar production. Malawi, which is landlocked, produces ethanol from molasses and fits this category.

As a result of weak economics in many parts of the world, most liquid biofuel programs have required subsidies, mandates, or both. The subsidies can be substantial. In Thailand, the total reduction in taxes and charges on E10 for gasoline with 91 research octane number was more than US$2 per liter of ethanol blended in 2012 (EPPO 2013), or triple the FOB price of gasoline with 92 research octane number in Singapore. From the point of view of mitigating the adverse effects of high oil prices, a fuel diversification strategy requiring large subsidies to combat high oil prices raises questions about efficacy. Another concern is the competition for fertile land and water, which could contribute to food price increases. Concerns about food security have prompted China to ban grains for ethanol production, India to restrict ethanol production to molasses, and South Africa to exclude maize and _Jatropha curcas_ (which is not edible but may nevertheless compete for water and land) from its national biofuel policy (South Africa 2007).

# **Reducing costs of supply**

Hedging, bulk procurement, infrastructure modernization and expansion, reducing regulatory barriers, and price disclosure to promote price competition are among the means employed to reduce costs of supply.

# **_Hedging_**

Hedging is a strategy intended to reduce the risk of adverse price movements—future oil prices rising for an oil purchaser, declining for an oil seller. Industries in which fuel costs make up a significant fraction of the total cost, such as aviation, have turned to hedging for years to mitigate fuel price volatility. Hedging risks were manageable until the last quarter of 2008, when world oil prices collapsed suddenly. Many airlines faced large losses from hedging in late 2008 and 2009, amounting to as much as US$1 billion for Air China. These losses have led to government interventions and investigations in some countries (China, Pakistan, and Vietnam), and even imprisonment of airline executives in Vietnam.

The cost of hedging in a way that protects the purchaser against an oil price collapse is high, but not paying that extra price could lead to a situation similar to the one in Sri Lanka. Large hedging losses suffered by the national oil company in 2008 led to protracted litigation, the Supreme Court’s ordering the treasury to handle fuel imports between December 2008 and November 2009, and temporary suspension of the chairman of the national oil company. China restricted hedging in 2009 after large losses suffered by 68 state-owned companies. Pakistan’s