Making Our Food Fuel Isn't the Answer

But biofuels have come to mean two things: a diesel fuel substitute derived from vegetable oils such as soybean oil, and ethanol derived from sources such as corn and sugar. These two biofuels were the subject of an excellent presentation at a conference in London last week, the gist of which I will summarize below.

First, those hoping for free-market economics are advised to look elsewhere. Mandates abound, from the European Union's "soft" mandate for 5.75% biodiesel use by 2010, up from 2% today, and its tax credit of $450 a metric ton, to the U.S. exemption of ethanol from the federal gasoline tax, to Brazil's mandated targets for ethanol use in motor fuels. The combination of agribusiness interests, farm-state votes, green lobbies, petroleum displacement and industrial policy is irresistible to politicians.

Second, high-petroleum product prices make production attractive. This is true for both European and American biodiesel derived from soybean oil and for American ethanol derived from corn. However, the recent jump in sugar prices, discussed here in February, has pushed Brazilian ethanol derived from sugar right to its break-even zone. This is a clear warning, one that we will return to below.

Capacity

Many of us learned in our youth about the capacity issues associated with ethanol. They exist for biodiesel as well. Current world diesel and fuel oil consumption is more than 1,500 million metric tons (MMT) a year. We can compare that to world vegetable oil production of 115 MMT per year, of which 6 MMT go to biodiesel production. As the presenter noted, if we diverted 100% of world vegetable oil production to biodiesel, we would displace 27 days of current diesel and fuel oil consumption.

We could run through a similar exercise with ethanol. If we distilled the entire U.S. corn crop and used none of it for human or livestock consumption, we could displace 85 days of gasoline consumption. Global sugar cane production is the equivalent of 113 MMT of ethanol; this compares to global gasoline consumption of 982 MMT of gasoline.