By BILL JACKSON, ERIC SPIEGE and LESLIE MOELLER
From Strategy+Business
In the flood of media attention that biofuels have received, it is difficult to distinguish the facts from the fanfare.
Generally made from corn, sugarcane, soy and other crops, biofuels for powering automobile engines have been hailed as a panacea that will arrest global climate change, reduce dependence on fossil fuels, ensure energy security and turbocharge agricultural economies. Yet biofuels have also been denounced by critics who claim they will do more harm than good to the environment and they are not economically sustainable absent government protection.
To determine who is right, we spoke to dozens of experts in government, corporate, academic, and nonprofit organizations and reviewed studies on the growth and viability of the biofuels market. Based on this research, we explored the truth of prevalent assumptions regarding both biofuel's promise and its impact on markets and the environment.
Perception: Substituting biofuels for petroleum will substantially reduce greenhouse gas (GHG) emissions. Reality: At least in the short term, biofuels offer minimal GHG benefits.
At first glance, biofuels appear to leave a much smaller carbon footprint than oil because energy crops (like all crops) extract carbon from the atmosphere. Indeed, studies such as the International Energy Agency's 2004 "Biofuels for Transport" report indicate that "well-to-wheel" GHG savings from biofuels range from 20 percent with corn ethanol to 80 percent or higher with sugarcane ethanol or cellulosic ethanol.
However, the well-to-wheel savings fail to take into account the impact of farming land that was, or would otherwise revert to, grassland or forest. Clearing land to convert forest or grassland into energy crops results in a substantial deposit of carbon dioxide into the atmosphere. Consequently, peering further into the future, the environmental hope for biofuels is not a complete chimera.
Perception: Biofuels are not economically viable as a substitute for petroleum. Reality: Biofuels offer a competitive alternative to petroleum.
Although break-even costs for different biofuel technologies vary significantly, in Brazil sugarcane ethanol is already commercially viable. Today, 85 percent of autos sold in Brazil feature flex-fuel power trains, and cane ethanol supplies a significant portion of the automotive fuel pool based on its economic merit. Thanks to the large number of flex-fuel vehicles, consumers can opt for whichever fuel is cheaper, which ultimately varies based on the relative prices of crude oil and sugar.
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 $55 per barrel without government incentives -- about half the price of oil now.
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.
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.
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.
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.
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.
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.
Replacing the appetite for petroleum with a taste for biofuels would no doubt result in the consumption of substantial agricultural resources. However, there is significant additional rain-fed land in the world available for agricultural production, according to the FAO and other global authorities.
