Positive Environment News

ANALYSIS - Farm-Grown Biofuels Look to Siphon Oil Demand

Date: 09-Jun-05
Author: Charlie Zhu and Neil Chatterjee

With $50-plus oil prices increasingly seen as the rule instead of the exception, major consumers worldwide are looking to dramatically increase their use of biofuels, environmentally friendly fuel made from sugar cane, vegetable or corn oils.

Homegrown crops offer consuming nations the opportunity to cut hefty oil import bills, reduce greenhouse gas emissions and revitalise agricultural incomes.

They could also help sate briskly rising consumption of motor fuel, which has pushed the oil industry to the brink of its capacity and helped inflate world prices. But biofuels have a long way to go before they will register on global markets.

Last year the world produced about 30 billion litres of fuel-ready ethanol from fermenting and distilling mainly sugar or corn. In oil terms, that's more than 500,000 barrels per day (bpd), 2 percent of global gasoline use.

"Although biofuel is taking off in a number of areas, in terms of absolute volumes it is still relatively small," said Jeff Brown, oil demand analyst at Paris-based International Energy Agency (IEA). "The real potential is in the longer-term."

Under the most optimistic scenario, ethanol could make up 10 percent of world gasoline by 2025, the IEA estimates.

For that to happen bio-energy will have to clear a number of hurdles -- high cost, diminishing land and water availability and mixed policy initiatives, to name a few.

But the payoff would be tremendous. Assuming 1.5 percent annual growth in gasoline demand up to 2025, ethanol fuel consumption could rise to 3.4 million bpd, analysts estimate. That would equate to about a tenth of incremental oil demand.

"By substituting up to 10 percent ethanol... you could displace one medium-sized OPEC country, like Iran," said oil consultant Geoff Pyne in London.

Up to 10 percent of biofuel can be blended into motor oils without the need for costly engine conversions.


Stubbornly high oil prices have renewed worldwide interest in biofuel and other clean energy sources, such as solar and wind power, as well as liquid fuel produced from gas and coal -- all of which siphons demand away from oil.

While major consumers have given some incentives to spur development, largely to help meet Kyoto Protocol emissions targets, few have established mandatory levels that would help organic-based fuels take a significant market share.

The European Union last year set a non-binding target of 5.75 percent biofuel content by 2010, but is likely to miss a more modest 2 percent target this year; Japan allows the use of up to 3 percent ethanol, but does not require it.

The United States, the world's top oil consumer and No. 2 biofuel producer, is taking bigger strides as it sees domestic crops as a way to curb its growing dependence on foreign oil.

A US Senate committee last month set a target of doubling ethanol production to 8 billion gallons by 2012 -- over 500,000 bpd and more than 5 percent of current gasoline use.

Brazil, the world's biggest producer of ethanol accounting for nearly half global output, already blends its domestic gasoline with 25 percent ethanol and is looking to US, Japanese and Indian markets to double exports in coming years.

In Southeast Asia, palm oil and sugar farmers hope to boost crop income by selling to biofuel producers.

"The potential of biofuels has the added attraction, at least for government policy makers in developing countries, of possibly also being a means of raising incomes for rural producers," said Andrew Symon of the Institute of Southeast Asian Studies.

Thailand has mandated a 10 percent ethanol-mix called gasohol from 2007, boosting production from nearly zero to 1.5 billion litres (26,000 bpd) by then. The Philippines is studying a diesel fuel blended with oil extracted from its abundant coconuts.

Biodiesel is less established than ethanol but is being actively pursued in Europe, where half of all

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