Once-revered biofuels are finding political ground shifting beneath them
Source: By Jonathan Kingsman, Platts • Posted: Wednesday, August 14, 2013
At the recent FT Commodity Conference in Lausanne, the CEO of Cargill warned that biofuels are losing political support. He argued that a few years back biofuels had the backing of three powerful constituencies (lobbies). The first, of course, was the Northern Hemisphere farmers who were keen to bring more land back into production and have another outlet for their crops.
The second, particularly in the USA, was the “energy-security” guys who wanted to reduce their country’s dependence on foreign oil and to have more control over energy supplies. The third was the greens, the environmentalists who immediately saw biofuels as a low carbon substitute for mineral oils and (dangerous) nuclear power. At a time when global warming was probably the number one concern for much of the rich world, the greens welcomed biofuels with open arms.
The environmentalists were the first to desert the camp. The financial crisis of 2008 diverted attention from global warming to the economy. (Remember how we all used to work out our “carbon footprints” and then try to reduce them.)
By unlucky coincidence severe weather problems in various parts of the world reduced agricultural production and sent food prices sky-rocketing. Protests in Mexico against the rising price of corn led to calls for less corn to be used for ethanol, even though the corn that the USA uses for ethanol is not the same corn that the Mexicans use to make their bread.
Environmentalists also attacked the Brazilian sugar industry for “destroying” the Amazon jungle, even though virtually no cane is grown anywhere near the Amazon. And in the APAC region palm oil producers were suddenly in the limelight for tearing up the Indonesian rain forests.
Even though very little palm oil is used in biodiesel production (most of the increase in palm oil demand has come from India and China), biodiesel took the brunt of the criticism. Just as the polar bear has become the totem of global warming, the Orang-utan has become the totem of all that was supposedly wrong with biofuels.
In their fight against biofuels the environmentalists have found wealthy backers in the form of the industrial food companies. A recent letter sent to the UK Prime Minister called for an end to biofuels made from food and was co-signed by Nestlé, Unilever, ActionAid, Oxfam and the WWF. The letter argued that biofuels “are exacerbating global hunger” with many varieties “worse for global warming than the fossil fuels they are meant to replace”.
The second constituency that biofuels have lost is the “energy security” one. The shale gas revolution in the US has been described as the most significant economic event of the past ten years and has significantly reduced the US’ dependence on imported energy.
Already in 2011 the U.S. exported more gasoline, diesel and other fuels than it imported for the first time since 1949: exports of petroleum products exceeded imports by 439,000 barrels a day, compared to daily net imports that averaged 269,000 barrels per day in 2010.
As for the farming constituency, farmers in developed countries have long been dependent on political support. Without subsidies and various price support mechanisms they would all be a lot poorer. To maintain political support they need to keep public opinion on their side, particularly in Europe.
As public opinion turns away from biofuels farmers may increasingly distance themselves from the biofuels industry, instead branding themselves as a force for good in providing healthy food to an ever growing population – and as guardians of the countryside. Farmers want to be seen as part of the solution to global hunger, not part of the problem.
In Europe, partly as a result of the strong lobbying by anti-biofuel groups the European Commission is proposing that total consumption of biofuels made from foodstuffs not exceed 5.5% of consumption. The proposal bought howls of anguish from the sector, particularly as their production capacity is already under-utilized: European bio-diesel capacity utilisation is running at around 28% while that of ethanol is running at 70%.
In the US, the sector is struggling to get the blend wall raised from 10% to 15% but it seems something of a losing battle, despite the fact that American made cars imported into Brazil run without any problems on a 25% blend of anhydrous ethanol in Gasoline.
The American Petroleum Institute is appealing to motorists’ wallets, arguing that an E15 incorporation will mean that the US would have to export more gasoline and that this would raise the price of gasoline domestically. The Renewable Fuels Association argues that this is nonsense and that ethanol is cheaper than gasoline so that more ethanol use means cheaper fuels.
In Brazil the government has until recently capped gasoline prices at a level that made ethanol production unprofitable. Poor weather and over-optimistic expansion added to the sector’s woes and some mills have gone bankrupt as a result; many others are on life-support.
The government recently increased gasoline prices and this has given the mills some breathing room. The country’s weakening Real will make gasoline imports more expensive and the government should raise domestic gasoline prices further. The politics of biofuels are also at the heart of policy battles in such locales as The Philippines and Thailand.
It is therefore not surprising that a siege mentality has developed within the global biofuels sector and the big industrial groups are moving their focus to second generation biofuels that do not compete with food for their feed stocks.
Investment in the sector is increasingly focused on Brazil. A spokesperson from BP recently announced that it would be directing investment in advanced biofuels to the US and South America and said “I think what we are becoming increasingly interested in is the integration potential between a sugar cane mill and a cellulosic plant.”
There is an old joke that “advanced biofuels are the fuel of the future, and always will be” but progress is being made. In the end, however, it will come down to cost. (The sugar industry here has a huge advantage in that the cellulose in question is already at the sugar mills so marginal transport costs are zero.)
However there is room for optimism also for first generation biofuels. As unfortunate as it may be, public opinion and policy is largely driven by lobbying. The industrial food giants are not lobbying against biofuels out of altruistic concern for public welfare but because they fear that increasing biofuels use will drive up their input costs.
However food costs have increased over the past years not because of biofuels but because of poor weather and rising production costs, particularly in US dollar terms with the dollar held at an artificially low level. In Brazil particularly poor weather has raised production costs through lower capacity utilisation; combine that with an over-valued Real and the dream that Brazil would become a supplier of cheap green fuel to the world evaporated.
These factors are being reversed as farmers plant more crops and the weather allows them to grow. This is already lowering commodity prices and allaying fears of rising food prices. This should reduce the economic incentive of the anti-biofuels lobby.
We have seen recently how Brazilian motorists reacted to lower ethanol prices; fears that ethanol was somehow “out-of-fashion” have proved unfounded. The biofuels sector has been struggling because their feedstock and their production have been too expensive: better weather and a stronger dollar should reverse that trend while at the same time taking the pressure off the sector in terms of food prices.
If, and this is a big if, world oil prices stabilise at around these levels you will see biofuels winning back the constituencies that they have recently lost