Biodiesel Demand Fuelled by Policy, Not Oil Prices

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BOGOR, Indonesia (6 April, 2011)_World media have reported a renewed interest in biofuels as unrest in the Middle East pushes crude oil prices to near $120 a barrel. Reports suggest that oil prices have driven demand for biofuels, prompting speculative investment in biofuel feedstocks, such as oil palm and soy.

The idea that high oil prices pushes biofuel demand has been overstated, says George Schoneveld, a scientist with the Center for International Forestry Research (CIFOR). The numbers, he says, simply do not add up.

“You have to look at two different markets that have an effect on biofuel demand: the food market and the fossil fuel market,” Schoneveld says.

“Crude oil at the moment is about $120 per barrel, which translates to about 75 cents per litre. Soy oil at the moment is selling for more than $1 per litre. So for someone producing soy, why would he produce biodiesel when he can make more money selling to the food market? Of course, when market distortions, like government mandates and subsidies, come into play, there is an incentive to produce biofuel.”

Schoneveld says that with current biofuel feedstock prices, crude oil would need to reach $160 a barrel before biofuel became a economically feasible alternative in a free-market environment.

“At the height of oil prices in 2008, crude oil cost $150 a barrel, and that’s when we started to see more political interest in and demand for biofuel. The current prices are not at that point.”

Economically, palm oil and soy are currently unattractive fuel sources as they both sell well above the price of crude oil following unseasonable weather and because of input constraints, such as labour, and high demand from emerging markets China and India. Companies looking to switch to the fuel market are also deterred by the cost of setting up processing facilities.

That does not mean demand for biofuels will not rise. In fact, demand is expected to almost triple this decade, not on free-market principles, but largely because of government policies that mandate a certain percentage of biofuel blending in transport fuel.

According to the Organisation for Economic Co-operation and Development and Food and Agriculture Organization, the European Union and the United States will be behind that demand as they are projected to become world’s biggest biofuel-importing markets by 2019. The EU mandates biofuel blends as part of its goal to reduce greenhouse gas emissions. The United States’ mandate is part of its energy security directive.

CIFOR scientists estimate crude oil would need to reach $160 a barrel before biofuel becomes a economically feasible alternative. Photo courtesy of newmy51/flickr

By 2019, the United States is expected to import more than 10.8 billion litres of biofuel, or 15.1 percent of its total domestic production. The European Union is expected to import almost 7.1 billion liters, or 18.4 percent of domestic production.

While oil prices are not directly affecting biofuel demand to a significant extent, they are pushing energy policy.

US President Barack Obama, announced on March 31 that the United States would cut one-third of its oil imports by 2025. Part of that plan includes government investments in advanced biofuels research and development, blender pumps and flex-fuel cars.

With the exception of Brazil, governments in the developing world are not showing the same enthusiasm for biofuel in energy policy. In his occasional paper – “Potential land use competition from first-generation biofuel expansion in developing countries”, released in January – Schoneveld says that developing nations producing biofuel feedstocks could improve their energy security and reduce vulnerability to oil price shocks by consuming their biofuel domestically.

In Africa, for example, 36 of 54 countries imported all their oil in 2008, when prices spiked to around $150 a barrel. When prices rise, these countries’ economies slow as they are either spending more of their GDP on oil or they consume less oil.

Africa, along with South America, has the most suitable and available land in the world for biofuel feedstock cultivation, and catering to the domestic market will not require much land.

“If you take Mozambique, for example, a 4,000 hectare sugarcane plantation could produce enough ethanol to substitute 10 percent of its gasoline consumption, without it having a profound effect on land use competition,” Schoneveld says.

“Technically, it’s very feasible, especially for those countries in Africa, to adopt policies to blend. However, it’s not always economically viable.”

Land use competition is a more serious concern in Asia. As biofuel demand rises, strict regulation is needed to ensure biofuel feedstock cultivation does not further drive deforestation or compete with agricultural land.

Almost all land suitable for growing feedstocks in Asia is classified as agricultural or forested. Palm oil, which is used mostly as an edible oil, is a major driver of deforestation in Indonesia, home to some of the world’s most biodiverse and carbon-rich rainforest. While only 5 percent of the world’s palm oil is used for biodiesel, the crop was once considered a viable source of biofuel for Indonesia’s domestic use.

In 2008, the Indonesian government – which has long subsidised petroleum – implemented a law and strategy to mandate a 5 percent biofuel blend by 2010 to increase incrementally to 15 percent by 2020.

“But the moment palm oil became more expensive, they would have had to put in place subsidies on top of the existing oil subsidies to make biodiesel profitable. When that happened, interest in biofuels waned and there were mandates that were not met.”

For more information:

Potential land use competition from first-generation biofuel expansion in developing countries

The role of national governance systems in biofuel development

The local social and environmental impacts of biofuel feedstock expansion