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Global Insight study predicts dramatic rise in biofuel - but at what cost?

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July 30, 2007

Global Insight study predicts dramatic rise in biofuel - but at what cost?

Global Insight study predicts dramatic rise in biofuel - but at what cost?

July 30, 2007 In his 2006 State of the Union address, George W Bush said that “America is addicted to oil.” By this, he meant that not only is the US a massive consumer of fossil fuel, but that this consumption leaves them grossly dependant and vulnerable to exploitation. Bush’s remark came at a time when the US had just surpassed Brazil in the production of ethanol fuel, often touted as the most likely contender to replace petroleum, or at least diminish the demand for it to manageable levels. The world market is already feeling the effect of increased interest in ethanol, which begs the question of whether biofuels can overtake petroleum as a power source – and if so, whether it will be the viable alternative its proponents claim, or simply a case of swapping one addiction for another. Global Insight, Inc., the world's leading company for economic and financial analysis and forecasting, has released a detailed projection for its possible future consequences.

Unlike petroleum, which is produced from finite resources of coal, biofuels are the result of an agricultural process, and are thus considered a form of renewable energy. Ethanol, the most commonly produced bioalcohol, can be distilled from harvested corn, sugar cane or wheat. The resultant fuel is able to power car engines as a complete substitute for petroleum, though is more commonly used in a mixture with gasoline. Being able to produce fuel domestically appeals greatly to countries in the habit of importing the majority of their petroleum, as the vastly uneven power relationship places them at the complete mercy of an erratic and gluttonous foreign market. The agricultural nature of production also means that the conversion to biofuel is extremely painless, as a large segment of the population will already possess the necessary skill set to create it. Brazil, which often beats the US in ethanol production, is a prime example of how quickly a transition can be made. Ethanol cars were brought to market in 1979, and by 1980 one quarter of newly manufactured cars were ethanol models. By 1986 they made up over three quarters of manufactured cars. This number did fall for the following few years, but since the introduction of mixed fuel initiatives, ethanol/gasoline models now make up 80% of manufactured vehicles. The US is eager to follow suit, legislating a proposed minimum benchmark of biofuel use in the Energy Policy Act of 2005, and awarding $375 million to bioenergy research centers. As a result of their enthusiasm, this year the US biofuel industry is worth $15 billion.

However, the ease in which existing infrastructure and resources can be shifted to producing biofuel has also proven to be potentially harmful, if left unguarded. With corn crops now under duel demand, from both biofuel producers and the food industry, prices have drastically fluctuated from an average of US$2.25 per bushel to over US$4.00. Governments trying to meet both markets are forced to dedicate still more land to farming, often resulting in extensive deforestation. And the World Food Programme of the UN has blamed the increase in corn price for their diminished ability to combat international famine. Additionally, the efficiency of biofuels is a hotly debated topic, and since the climate they are harvested in affects their make-up, it is very hard to draw conclusive results.

The Global Insight study, titled The Biofuels Boom: Implications for Agriculture, Energy, and Automotive, is an in-depth examination of how the international biofuel industry will evolve over the next two decades. The report predicts that by 2030, world demand for bioethanol will reach 80 billion gallons, and world demand for biodiesel will reach over 20 billion gallons. John Kruse, Managing Director of the Global Insight Agriculture Group, states that "the demand for biofuels may be the most significant development in agriculture since the development of hybrid corn in the 1930s."

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