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Biofuels production is expanding rapidly all over the world. In the US President George W Bush used his 2007 State of the Union address to propose a mandatory target for the replacement of about a fifth of oil-based transport fuels by inclusion of 35 billion gallons of biofuels in the fuel sold by 2017. This is a sharp increase from the current production of 4.2 billion gallons
by 97 ethanol refineries. 78 more refineries were under construction in the US in early 2007.
Ethanol production already takes 26% of the US sorghum crop and it is estimated that it will take 25% of the maize produced in the US in 2007. Since the US has been supplying 70% of all the grain traded internationally, the amount it has available for export is almost certain to shrink and further increases in the world price of grain can be expected. Price pressure will be
increased further because the EU has set itself the target of replacing 10% of its transport fuels by biofuels by 2020. This follows on from the current target of 5.75% biofuels in the transport mix by 2010. The EU accepts that it does not have the agricultural resources to produce the additional biofuel itself and that substantial imports will be required.
This dash for more biofuels is due to two factors - the rise in oil prices and the threat of climate change. Oil prices have roughly tripled since early 2002 partly because the major energy companies have not invested in building enough refinery capacity to meet the growing level of world demand. World oil production has gone up by 40% in the past 20 years while refinery capacity has only gone up 15%. In particular, the companies have failed to invest in the right type of refinery. The world's output of 'sweet' (that is, easily refined) oil is declining because the fields from which it comes like those in the North Sea are becoming exhausted. As a result, they have too little of the more complex and expensive refinery capacity needed to process the remaining 'sour' oils1.
A second reason for the high prices is that the companies have not been able to find enough new oil fields to replace those becoming exhausted. This is despite the use of increasingly sophisticated exploration techniques. 2003 was the first year in recent times when no new major oil field was discovered. Oil is being pumped out of the ground three times faster than it is being
replaced by new oil finds. As a result, the oil reserves discovered between 1950 and 1980 are being run down. Consequently, unless
a global economic depression develops, oil’s decreasing availability is likely to push its price up to levels far above those ruling at present. A Texas investment banker and a former energy adviser to President Bush, Matt Simmons, told the BBC in 2004 that a price of $182 might be required to balance supply and demand. Even if a depression does develop and prices fall back, oil
may not become any more affordable for many poor people because, as less work will be available for them, their earnings will drop. Most Southern African countries import oil and the rise in price has had a serious negative impact on their balance of payments.
The price of oil has also had a large impact on the price of food. Modern agriculture is highly energy intensive. A recent study conducted by the South African Department of Agriculture2 estimated that at least 12.5% of the final energy demand in South Africa came from the agricultural sector and its backward and forward linkages. The higher cost of this energy has to be passed on. This means that food prices can be expected to rise for two reasons – the higher cost of producing it and because the surpluses which have had the effect of depressing the world price of grain have been removed from the market to be converted to motor fuel.
To some extent, the price rises will restore a longrunning relationship between the price of oil and the price of grain - what Lester Brown has called “the wheatoil exchange rate3. From the 1950s to mid 1970s the price of both wheat and oil was remarkably stable and a bushel of wheat could buy a barrel of oil. But from 1973, oil prices went up but foodstuffs did not and it now takes 13 bushels of wheat to buy one barrel of oil.
Footnotes:
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Emissions Rationing and the oil price crisis. www.feasta.org
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Energy Use in South African Agriculture and its Future Supply. R. Douthwaite and A. Sugrue. Prepared for the Department of Agriculture. Draft format available only.
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Plan B2.0. Rescuing a planet under stress and a civilization in trouble. Lester R Brown. www.earth-policy.org
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