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(originally published by Booz & Company)


A Clear Look at Biofuels

Globally, corn ethanol is still much more expensive than petroleum and will be until oil prices rise another 20 percent or so. Cellulosic ethanol, although still in the early stage of development, will likely break even with petroleum when the former is around US$55 per barrel without government incentives — about half the price of oil now and a little below the International Energy Agency’s 2007 forecasted oil price of $62 a barrel in 2030.

Perhaps the biggest endorsement of biofuels as an economically viable alternative to petroleum has come from the Organization of the Petroleum Exporting Countries (OPEC) itself. Abdalla El-Badri, secretary-general of OPEC, noted in June 2007 that the consortium was considering cutting its investment in new oil production in response to moves by the developed world to create and use more biofuels. “If we are unable to see a security of demand…we may revisit investment in the long term,” El-Badri said.

Perception: Global energy markets are so vast that biofuels cannot hope to alter the balance of petroleum supply and demand.
Reality: If agricultural supply expands at historical rates, biofuels can make a significant contribution to the transportation fuel pool, resulting in an oversupply of petroleum.

It’s important to note that although biofuels are the best and most cost-efficient hope for an alternative to petroleum, biofuel production still represents less than 1 percent of total global fuel demand. However, if agricultural improvements continue apace, biofuels can eventually equal or surpass current OPEC exports without jeopardizing the world’s food supply.

With rare exceptions, for the last half century, advances in plant breeding, soil study and fertilizer use, water management, weed and pest control, and infrastructure development have increased crop yields and agricultural productivity. Farming also produces more food using less labor, capital, chemicals, and land.

New techniques, such as more sophisticated genetic approaches to breeding, may well accelerate the rate of improvement in agricultural productivity. By 2030, we anticipate that crop yields will increase by some 55 percent and that food crop prices will have fallen to roughly half of 2005 levels. At that time, if the International Energy Agency’s crude oil price predictions are accurate, we expect biofuel production would cost-effectively offset between 40 and 50 million barrels of oil per day, or about 40 percent of the total global need. If agricultural supply increases at half that rate, biofuel volumes would drop to roughly half that level. This supposes, of course, that the agricultural supply base develops as we’ve assumed and the biofuel infrastructure continues to expand.

Perception: Biofuel crops will crowd out food crops, driving food prices up and food consumption down in the developing world.
Reality: If crop yields and agricultural productivity improve at historical rates, future food prices need not be higher than they are today.

Some in the media have blamed biofuels for the recent run-up in food prices — for corn in the U.S., tortillas in Mexico, pasta in Italy. Although biofuels are a contributor, current volumes are too small to account for these recent regional commodity price spikes. Other factors such as droughts and inventory levels have had a significant impact.

Despite this evidence, critics maintain that over time biofuel production will almost certainly outpace that of food crops, resulting in greater malnutrition, particularly in poorer parts of the world. These arguments are persuasive, but the developing world’s food woes cannot be laid entirely at biofuels’ door. Farmers in these markets are already at a disadvantage when it comes to accessing the latest agricultural practices and information on yield improvements. In addition, government policies, lack of infrastructure, political instability, and cheaper imports from the U.S. and Europe further depress crop yields in these areas, causing global consumers to lose up to 30 percent of their potential agricultural production today.

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  1. Fengxia Dong, “Food Security and Biofuels Development: The Case of China" (PDF), Iowa State University Center for Agricultural and Rural Development, Briefing Paper No. 07-BP 52, October 2007: The background, history, and current state of biofuels development in China, and implications for other developing countries.
  2. Richard Doornbosch and Ronald Steenblik, "Biofuels: Is the Cure Worse than the Disease?" (PDF) Organisation for Economic Co-operation and Development Roundtable on Sustainable Development, September 2007: A report on the facts and myths surrounding biofuels.
  3. "Biofuels for Transport: An International Perspective" (PDF),  International Energy Agency, April 2004: The costs and benefits of biofuels as a replacement for petroleum around the world.
  4. "Potential Contribution of Bioenergy to the World’s Future Energy Demand" (PDF), International Energy Agency Bioenergy, 2007: A summary of biomass resources and associated issues of market development, international bioenergy trade, and how these resources stack up against other energy options.
  5. World Resources Institute’s EarthTrends Web site: A collection of facts, articles, and documents relating to environmental trends and concomitant social and economic issues.
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