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Backlash against biofuels could drive up energy costs

Thursday, May 15, 2008
By Richard Valdmanis and Timothy Gardner, Reuters


NEW YORK -- A backlash against biofuels that are widely blamed for contributing to a staggering spike in global food prices could have the unintended consequence of intensifying a rally in the cost of energy.

Biofuels use has surged among countries seeking ways to reduce costly petroleum imports. But the redirection of food into vehicle tanks instead of grocery stores has triggered a push-back, particularly against U.S. corn-based ethanol.

Some U.S. politicians, including Sen. John McCain, the Republican presidential candidate, are calling on environmental regulators to scale back renewable fuels legislation. An adviser to the U.N. Secretary-General this month urged the United States and Europe to cut biofuels use to take pressure off the soaring cost of food.

"In a limited way, the use of biofuels can help slow the acceleration of gasoline prices. So if you did have a backlash that results in the biofuels mandates being reversed, that would result in more use of petroleum-derived fuels and, theoretically, in higher (energy) prices," said Eric Wittenauer, an energy analyst at A.G. Edwards in St. Louis.

Indeed, biofuels have made inroads into the global energy system. The U.S. Energy Information Administration expects biofuels to make up 2.3 percent of global petroleum use by 2015 and 3.5 percent in 2030, up from around 1 percent now.

The United States last year passed a law requiring the country's gasoline supply to include 36 billion gallons of renewable fuels by 2022. At current consumption rates, this would result in ethanol comprising 25 percent of gasoline demand. Ethanol supply from corn would be capped at 15 billion gallons, about double the current capacity.

EU leaders, meanwhile, pledged last year to increase the proportion of biofuels used in petrol- and diesel-consuming land transport to 10 percent by 2020.

Removing biofuels from the mix "certainly wouldn't help oil prices. Because there's such low spare capacity and concerns over supply disruptions, there would be an impact on the price of oil," said Linda Doman, EIA analyst.Oil prices have risen six-fold since 2002 amid increases in demand from China, India and other rapidly developing nations.

Predictably, U.S. ethanol lobbyists paint a dire picture of what reduced mandates would do to gasoline prices. The Renewable Fuels Association, an industry group, last week warned that pump prices would jump more than a dollar a gallon if U.S. regulators followed Texas Gov. Rick Perry's proposal to waive half the 2008 mandate for 9 billion gallons of ethanol.

But energy experts called that prediction overblown, saying the pump price of gasoline would probably rise just pennies a gallon.

They say U.S. refiners still would buy up to 80 percent of the ethanol they currently use to make reformulated gasoline (RFG), a clean-burning fuel that is required in smoggy parts of the country.

"A big chunk of this year's mandate is taken care of by the RFG, which is a captive market," said Antoine Halff, analyst at Newedge Group in New York.

While soaring food prices have shaken the love affair with ethanol and biodiesel, a significant roll-back of ambitious output targets is unlikely in the United States under the administration of President George W. Bush.

"After the election it seems to me quite likely that lawmakers will take a good hard look at the ethanol policy," Halff said.

In the meantime, the problem of food and fuel inflation will likely add pressure on energy consumer nations to shift away from food-based biofuels.

"The price increases would serve as a force to accelerate the development of non-food-based feedstocks, like biomass and cellulosics," said Sander Cohan, analyst at Energy Security Analysis Inc. in Boston.

It may also raise the likelihood that the United States will lift a 54 cent per gallon tariff on Brazilian ethanol, which is mostly sugar based, experts said.

"Maybe removing the tariff will be a more expedient way of bringing some relief on corn prices," said Halff.

Global sugar prices are at historic lows on glutted supplies, while corn prices have hit records and dragged other grain prices as nearly a quarter of the U.S. corn crop goes to make ethanol.

Copyright © 2008 The China Post.
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