Fuel versus food

Brazil was the second country to embark on the production of biofuels. It had greater success in reorienting its pattern of energy consumption. Today 40 per cent of its automotive fuel is from sugar-based ethanol; 80 per cent of the cars sold in 2006 were 8216;flex fuel8217; in that they can run on both ethanol or gasoline and the retail infrastructure allows a motorist to decide at the pump itself whether to fill the tank with ethanol or gasoline or a blend of both.

The reasons for Brazil8217;s success are essentially two fold. First the government decided early that they could not secure petroleum self-sufficiency through domestic production and that alternatives to gasoline had to be developed. They initiated a pro-alchol programme in Brazil, ethanol is known as alchol in the mid 8216;70s and supported that through a series of fiscal incentives. The tax burden on ethanol for instance accounts for only 28 per cent of its final pump price whilst that of gasoline is 45 per cent. Second, they built on their high yielding, low cost and integrated sugar processing and ethanol blending structure. The industry was able to generate significant economies of scale and efficiency and as a result today the ethanol production costs 1.10 E/gallon are amongst the lowest if not the lowest in the industry. Brazil is the largest producer of ethanol in the world accounting for 45.5 per cent of global production.

Europe too initiated steps to produce bio-fuels. The Common Agricultural Policy CAP incentivised the production of ethanol from a combination of sugar beets and wheat and the European Commission passed legislation to encourage the production of biodiesel from rapeseeds and sunflower seeds. But even though Europe now accounts for 90 per cent of the global production of 1 billion gallons of biodiesel the impact of these efforts on its energy basket has been miniscule.

In recent months the biofuels industry has been given a massive push. This is because of the broadening consensus that the era of cheap oil is over and that oil prices will range between USD 55-65/barrel. Ironically President Bush has been its strongest proponent. In other countries too including India, the biofuels industry is witnessing a burst of activity. The Indian government has contemplated a 5 per cent ethanol blend and the pricing of long-term contracts between ethanol producers and the public sector oil marketing companies has been agreed.

Profession Runge and Senaeur are concerned about the implications of this 8216;biofuels craze8217; on food security. They have written that the ethanol industry is causing a sharp upward spike in the prices of staple food corn, wheat, rice. This is happening in the US because of the enormous demand for corn by the ethanol producers; the shift in tilled acreage towards corn and away from other crops and the play of the ubiquitous hedge fund speculator. Elsewhere prices are rising because of inter-linkages. The price of Mexican tortilla flour has for instance doubled in 2006 because Mexico imports 80 per cent of its corn requirements from the US and the price of a bushel of imported US corn has increased from 2.80 to 4.20. The professors cite a study carried out by the International Food Policy Research Institute IFPRI. The institute projects that on the assumption that the present trend will continue, the rising demand for biofuels will increase global corn prices by 20 per cent by 2010; oil seeds including soyabeans, rapeseed, and sunflower by 26 per cent, wheat by 11 per cent and cassava by 33 per cent. The professors state that this will undermine the UN8217;s Millennium Development goal to halve the proportion of the 8216;chronically underfed8217; from 16 per cent in 1990 to 8 per cent by 2015. This is because their research has shown that for every one per cent increase in the price of staple foods, the number of 8216;food insecure8217; people increases by 16 million. The professors also caution against using the 8216;green8217; peg to promote biofuels. In their view and to support this view they provide statistics on the net energy balance, that is, the ratio between the energy produced and the energy required to produce the environmental benefits of biofuels are limited at best.

I am no expert on this subject but reading this article two issues get highlighted. One, the biofuels industry presents a conundrum for oil import dependent countries. This is because the economics of the industry depends on a high oil price scenario. Were prices to fall to around USD 35/barrel, the industry would lose its competitive rationale. Two, the significance of technology and demand management. If, for instance, technology could commercialise the conversion of cellulose from plants, leaves, straws etc into ethanol and/or if oil demand were cut back through energy conservation and energy efficiency many of the professors8217; concerns would get addressed. The underlying reality remains: The 21st century challenges of energy security, climate security and food security cannot be sustainably addressed without a broad based and balanced policy that covers supply and demand and is underpinned by technology.

The writer is chairman, Shell Group in India. Views are personal