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Wednesday, November 07, 2007

"Biofuels Can Match Oil Production"

Ricardo Hausmann with an optimistic view of the potential for biofuels as an alternative to oil:

Biofuels can match oil production, by Ricardo Hausmann, Commentary, Financial Times: Peering into the future seldom produces a clear picture. But this is not the case with bio-energy. Its long-term impacts on the global economy appear to be pretty clear, ... including the demise of the price-setting power of the Organisation of the Petroleum Exporting Countries and the end of agricultural protectionism.

First, technology is bound to deliver a biofuel that will be competitive with fossil energy at something like current prices. It probably already has. Brazil has been exporting ethanol to the US... in spite of a 54 cents a gallon tariff...

There is plenty of private venture capital money being poured into finding more efficient ways of extracting energy from biomass... New technologies will be able to extract energy from cellulose, allowing the use of pastures such as switch grass as well as the refuse of current food production. The cheque is in the mail.

Second, the world is full of under-utilised land that can grow ... biomass... Rodrigo Wagner and I have estimated that there are some 95 countries that have more than 700m hectares of good quality land that is not being cultivated. ... So the production potential of biofuels is in the same ball park as oil production today.

Third, even if only partially used, this large potential biofuels supply will cap the price of oil because its supply is much more elastic than the supply of oil. This will cause the price of oil to be set at the marginal cost of bio-energy, independently of the production decisions of Opec. ... Oil producers will still be rich, but they will not have incentives to form a cartel.

Fourth, ... This will imply a very large increase in the demand for agricultural land. Its price and that of the products that use it intensively – such as food and cotton – will go up. By how much? This will depend ... on the ... degree to which food crops will be complements or substitutes of bio-energy: they would be substitutes if switch grass were planted instead of soybeans; they will be complements if biofuels are made out of wheat stalk. My bet is that they will tend to be more substitutes than complements and the relative price of food will go up.

Fifth, the increase in the price of agricultural land and of food will relieve governments from the current political pressure to protect the agricultural sector. Governments that, as a consequence of the land glut, have been protecting and subsidising farmers will see them grow rich...

By contrast, consumers will be less enthusiastic and demand that something be done about the price of food. The obvious solution will be to cut back on protectionism and liberalise trade in agriculture.

Sixth, the countries that have the largest endowment of under-utilised lands are in the developing world, especially Africa and Latin America. Putting that land into production will require a type of infrastructure that ... usually crowds in other forms of investment by lowering transport costs in ample regions of the country. Bio-energy will make those infrastructure investments socially profitable, creating a possible stepping stone into other industries.

Some policy action in industrialised countries will be required to make this world possible. ... To make this scenario appealing, the impact of the expansion of the agricultural frontier on the environment and biodiversity, and the distributive effects of the rise in food prices will have to be addressed. But these problems seem solvable...

    Posted by on Wednesday, November 7, 2007 at 12:24 AM in Economics, Environment, Oil | Permalink  TrackBack (0)  Comments (28)

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