Zoo Station

First of all, I want to apologize to everyone for not having posted anything real in eons. I have just been bandwidth constrained and getting used to the new job (which i will post about soon) is taking a while. Hopefully, I will be able to get back to a reasonable posting schedule in a little while.

I have, however, been paying a lot of attention to the bio-fuels market, both as part of the new job and from my personal interest in alternative fuels. By the end of this year, for instance, Brazil will become energy self-sufficient with minimum fuss. Driving Brazil's move away from fossil fuels is its sugarcane-based ethanol industry, nurtured carefully over the last 30 years, which allows ethanol to be sold for considerably less than gasoline. The New York Times had the details.

The use of ethanol in Brazil was greatly accelerated in the last three years with the introduction of "flex fuel" engines, designed to run on ethanol, gasoline or any mixture of the two. (The gasoline sold in Brazil contains about 25 percent alcohol, a practice that has accelerated Brazil's shift from imported oil.) But Brazilian officials and business executives say the ethanol industry would develop even faster if the United States did not levy a tax of 54 cents a gallon on all imports of Brazilian cane-based ethanol.

With demand for ethanol soaring in Brazil, sugar producers recognize that it is unrealistic to think of exports to the United States now. But Brazilian leaders complain that Washington's restrictions have inhibited foreign investment, particularly by Americans. As a result, ethanol development has been led by Brazilian companies with limited capital. But with oil prices soaring, the four international giants that control much of the world's agribusiness — Archer Daniels Midland, Bunge and Born, Cargill and Louis Dreyfuss — have recently begun showing interest.

Brazil says those and other outsiders are welcome. Aware that the United States and other industrialized countries are reluctant to trade their longstanding dependence on oil for a new dependence on renewable fuels, government and industry officials say they are willing to share technology with those interested in following Brazil's example. "We are not interested in becoming the Saudi Arabia of ethanol," said Eduardo Carvalho, director of the National Sugarcane Agro-Industry Union, a producer's group. "It's not our strategy because it doesn't produce results. As a large producer and user, I need to have other big buyers and sellers in the international market if ethanol is to become a commodity, which is our real goal."

The ethanol boom in Brazil, which took off at the start of the decade after a long slump, is not the first. The government introduced its original "Pro-Alcohol" program in 1975, after the first global energy crisis, and by the mid-1980's, more than three quarters of the 800,000 cars made in Brazil each year could run on cane-based ethanol. But when sugar prices rose sharply in 1989, mill owners stopped making cane available for processing into alcohol, preferring to profit from the hard currency that premium international markets were paying. Brazilian motorists were left in the lurch, as were the automakers who had retooled their production lines to make alcohol-powered cars. Ethanol fell into discredit, for economic rather than technical reasons. Consumers' suspicions remained high through the 1990's and were overcome only in 2003, when automakers, beginning with Volkswagen, introduced the "flex fuel" motor in Brazil. Those engines gave consumers the autonomy to buy the cheapest fuel, freeing them from any potential shortages in ethanol's supply. Also, ethanol-only engines can be slower to start when cold, a problem the flex fuel owners can bypass.
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Brazilian producers estimate that they have an edge over gasoline as long as oil prices do not drop below $30 a barrel. But they have already embarked on technical improvements that promise to lift yields and cut costs even more.

This brings me to an Economist profile of Vinod Khosla a couple of issues back which explained at some length Khosla's interest in bio-fuels, especially ethanol. Most importantly, it also explained pithily the single biggest problem I've seen with ethanol, namely that the economics seem to work only when the price of oil is sky high, which is not something we can take for granted, knowing what we know about OPEC's control over oil prices.

Mr Khosla concedes that after he made his ethanol pitch at this year's Davos meeting, a senior Saudi oil official sweetly reminded him that it costs less than a dollar to lift a barrel of Saudi oil out of the ground, adding: “If biofuels start to take off we will drop the price of oil.” Anticipating this problem, Mr Khosla is lobbying politicians in Washington, DC, to impose a tax on crude oil if the price falls below $40 a barrel to safeguard investments in ethanol.

Nonetheless, Khosla remains undeterred by possible OPEC machinations, and he's just picked up equity in Praj, an Indian company that I've been following for the last couple of months. I think he's got himself a really sweet sub-$5 million deal by getting a slice of a company whose technologies are being picked up in other emerging markets including South Africa.

So, what is the downside to the bio-fuels story? Well, there is a real possibility of loss of forest cover as people fell trees to grow more sugarcane, soyabean etc (which makes wasteland-based crops like Jatropha very interesting). The New Scientist has more on the possible price being paid by forests as green fuels gain in popularity.

The main alternative to palm oil is soybean oil. But soya is the largest single cause of rainforest destruction in the Brazilian Amazon. Supporters of biofuels argue that they can be "carbon neutral" because the CO2 released from burning them is taken up again by the next crop. Interest is greatest for diesel engines, which can run unmodified on vegetable oil, and in Germany bio-diesel production has doubled since 2003. There are also plans for burning palm oil in power stations.

Until recently, Europe's small market in biofuels was dominated by home-grown rapeseed (canola) oil. But surging demand from the food market has raised the price of rapeseed oil too. This has led fuel manufacturers to opt for palm and soya oil instead. Palm oil prices jumped 10 per cent in September alone, and are predicted to rise 20 per cent next year, while global demand for biofuels is now rising at 25 per cent a year. Roger Higman, of Friends of the Earth UK, which backs biofuels, says: "We need to ensure that the crops used to make the fuel have been grown in a sustainable way or we will have rainforests cleared for palm oil plantations to make bio-diesel."