October 11, 2007
Economic Snapshot — October 12, 2007
OECD report takes a closer look at future impact of biofuels
In Snapshot 34, we described how Brazil had, after 30 years of effort, achieved energy self-sufficiency by means of a massive program to convert sugar cane to ethanol. Now, in an attempt to reduce dependence on oil and become “greener,” many other countries are jumping on the ethanol bandwagon, too.
However, a recent Organization of Economic Cooperation and Development (OECD) paper entitled Biofuels: Is The Cure Worse Than The Disease? raises some serious questions regarding the costs of the increased reliance on ethanol as a petroleum substitute. In particular, the environmental costs in terms of the degradation of land by the use of more fertilizer and pesticides and increased air pollution were considered.
Currently, conventional ethanol and biodiesel account for an estimated 1% of the world’s total energy use. The OECD report indicates that it should be technically possible by 2050 to produce enough of these two fuel sources to supply an estimated 11% of global demand for total road transport fuel.
However, according to the paper, the growth of biofuels is also likely to place pressure on the environment and the planet’s biodiversity. Moreover, achieving this level of output will result in an increasing amount of food-producing land being used to produce fuel. Tropical countries with large, poor rural populations are already seeing increased pressure on food prices.
According to the report, only a few countries will be able to cut their oil imports significantly with increased biofuel production. Even in these countries, biofuel production is likely to be sensitive to movements in petroleum prices. As a result, higher oil prices will raise the production costs of biofuels and exert upward pressure on commodity prices. This link between oil and biofuels limits the possibility that increased biofuel production can lower transportation costs.
As is the case with many quick fixes, biofuel production can work well on a small scale since problems can be easily overlooked. On a larger scale, however, the small problems become bigger. In the case of biofuel production, they become impossible to ignore.
John Clinkard has 30 years experience as an Economist in international, national and regional research and analysis with leading financial institutions and media outlets in Canada.
Energy Consumption By Type: World vs Canada*
*Latest data available is for 2004.
Data source: Internation Energy Agency/Chart: Reed Construction Data — CanaData.
