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Futureviews Biofuels: a Trend That May Begin to Influence Energy Markets

The concept of biofuels has been around for many years but has always been associated more with hype than rational analysis. There is now a renewed interest in diesel fuel extracted from oilseeds, and…

The concept of biofuels has been around for many years but has always been associated more with hype than rational analysis. There is now a renewed interest in diesel fuel extracted from oilseeds, and gasoline replacement with ethanol from corn, sugar, grain or straw [The Economist, May 2005]. This renewed interest is due to more favorable economics, geopolitical forces and societal trends, but in the grand scheme of things, it is still small potatoes [Energy Postcard, FutureViews, October 2004]. For the forest industry sector, a closer understanding of this phenomenon is useful in the context of Kyoto and carbon accounting, where there is a recent shift in the business landscape regarding initiatives for “climate change driven technologies.”

U.S. output of maize-based ethanol is rising by 30% a year; Brazil is still the world leader in sugar-based ethanol; China has built the world’s largest ethanol plant. Biodiesel use is increasing in Germany, France and the UK. However, output from all of these initiatives is small compared to that from fossil fuels. Behind this recent surge is the new economics of fossil fuels, which command a large political risk premium in the current world and near-term future [reference: a steady stream of anxiety from Russia, the Middle East and South America]. The important question is whether this is the start of a new growth curve for biofuel or a short-term blip? The pioneering use of ethanol in cars in Brazil was only sustained through high oil prices and state subsidies; this ended in the late 80’s and the ethanol fuel economy collapsed. With the resurgence of high oil prices, the use of ethanol in gasoline blends is re-emerging. With predictions for long-term oil prices ranging anywhere from $35 to the sky’s the limit, long-term investment in biofuels would appear to be risky. Another driving factor is environmental attitude, but this is notoriously fickle. As a collective, people will proclaim their allegiance to environmental principles but as individuals many are driven by a simple perceived cost / performance assessment of the product or service in making buying decisions. History shows that where there is a choice, consumers will not in general pay any large premium for an environmental benefit that does not directly affect them [e.g. brown coffee filters, low brightness paper, paper grocery bags, FSC wood to mention a few in our sector]. This is an interesting point and highlights the psychological buttons that need to be pushed for any product or service with only a high environmental quality factor to offer. The creation of compelling stories or brands as a product attribute is a good starting point, [The Dream Society, FutureViews, June 2000; The Market for Emotions, FutureViews, December 2000]. Clean local air for our children might be the basis for such a story. However on environmental issues, government regulation is usually the prime driver in forcing consumer behaviour, and frequently involves some form of hidden tax or subsidy. Another important driver is also emerging in importance — the push for independence from foreign oil in a post-9/11 world.

Why is this important?

In the U.S., the ground is slowly shifting and we may be at a tipping point toward more balanced energy policies. These would include “clean, domestic petroleum substitutes and increased efficiency in our transport system,” according to the Energy Future Coalition — typical of a growing cadre of a lobbying group commentary. The CEO of Abengoa [a leading EU ethanol producer] claims that at US$50 per barrel, oil is competitive with unsubsidized ethanol in the U.S.; the figure is US$70 in the EU. The differences are in the raw material costs, where Brazil is the current global low-cost producer. Abengoa is also researching the production of ethanol from straw rather than grain; the Canadian government and private oil companies are also promoting “cellulosic” ethanol from straw and wood waste. Genetic engineering research at Israel’s Weizmann Institute of Science has recently announced a new form of cellulosome — a molecular complex that degrades cellulose. In the laboratory, the modified cellulosome took only a day to turn finely chopped paper into syrup of soluble sugars [The Futurist September 2005]. The forest industry must place the biofuel business on its strategic agenda and clarify its future role in a new energy landscape. A scenario approach with early-warning signals would be a useful starting point to identify a framing reference for strategic planning. The possibilities could range from “new business opportunities,” to “dashed hopes,” depending on the biofuel business scenario.

Alan Procter is an international consultant and strategic adviser. He can be reached through www.alanprocter.com