ANALYSIS - Can Biofuels Become the Next Petroleum?
Date: 05-Oct-06
Country: NETHERLANDS
Author: Anna Mudeva
Analysts say production of biofuels -- made from sugars, cereals and vegetable oils -- cannot be scaled up substantially to reduce global dependence on oil because of limited raw materials, high cost, lack of a global market and uncertainty over government policies.
A second generation of biofuels, based on non-food crops, stands a better chance but only as part of a broader strategy to reduce energy use in transportation and in combination with strict land-use laws to avoid environmental damage, they say.
The main problem of biofuels, however, is that they have been driven by political strategies lacking long-term guidance, which makes investing in the sector a risky undertaking.
"There is huge uncertainty over what governments intend to do," Pierpaolo Cazzola, analyst at the International Energy Agency (IEA), said.
"The whole subject of biofuels has a high degree of political uncertainty -- trade barriers, agricultural subsidies, energy policies," he added.
Heightened political worries about climate change, energy security and soaring oil prices have triggered a race to produce ethanol and biodiesel. Governments offer subsidies, tax breaks and set targets for minimum amounts that must be blended with fossil fuels.
Some analysts say the key driver is not so much the environment as an attempt to keep powerful farm lobbies content, particularly in the European Union and the United States, and avoid tougher political decisions such as cutting energy demand.
POLICY UNCERTAINTY
The EU, the world's biggest biodiesel producer, has set usage targets for 2010 but there is no real clarity from member states over how to achieve them, with some intending to scrap existing tax breaks and move to compulsory blending.
The US has targets running until 2012 but uncertainty over long-term policies remains.
"If you are a large company how do you make an investment decision when the rules of the game are not clear in the longer run?" asked Christian Delahouliere, Paris-based consultant.
The need for consistent, long-range policies is even more important as most biofuels cannot survive without government support. They are still uneconomic in developed countries and hefty tariffs and transport costs weigh on imports.
"Biofuels will not grow unless they are being forced upon producers or there is a tax incentive," said Sandrine Dixson-Decleve, executive director Europe & Africa at global information provider IFQC Biofuels.
Ethanol, for which production more than doubled from 2000 to 2005, comprised only 2.0 percent of the world's petrol supply last year, IEA data showed. Biodiesel expanded nearly fourfold but its share of diesel supplies reached a meagre 0.2 percent.
RISK OF LOWER OIL PRICE
Another major risk to investors who have been eager to jump on the biofuels bandwagon is a lower oil price.
Record levels of about US$78 a barrel earlier this year raised a fuss about green fuel, with shares in some US clean energy companies' gaining over 150 percent in the year to this summer, despite the firms reporting losses.
But with oil prices falling below US$65 in the past month, investors' confidence has waned.
"A slump in the price of fossil fuels would have a detrimental effect on global biodiesel demand," Credit Suisse said in a recent report.
Projects for new plants are mushrooming around the world, raising the risk of greater competition for land and feedstock, which can lift prices of biofuels and food.
Analysts said insufficient feedstock and the threat of biodiversity and environmental damage, particularly in regions with tropical forests, are major constraints to large-scale production of first-generation biofuels.
A rise in global biodiesel share to two percent of the total amount of diesel used in transportation would completely deplete current vegetable oil stocks, Credit Suisse said.
"Biofuels can give a substantial con
