5.1 BIOETHANOL MARKET FORCES IN 2007

5.1.1 The Impact of Oil Prices on the "Future" of Biofuels after 1980

“Economists attract ridicule and resentment in equal measures.”1

The most telling aspect of the above quote is not that it derives from a recent col­lection of essays originally published in The Economist, one of the leading opinion formers in Western liberal economic thought, but that it is the first sentence in the Introduction to that volume. Graphical representations from many economic sources share one common factor, a short time axis. In the world of practical economics, hours, days, weeks, and months dominate the art of telling the near future — for price movements in stock markets, in the profitability of major corporations and their mergers, the collapse of currencies, or surges in commodity prices. Extrapo­lations are usually linear extrapolations from a small historical database of recent trends. Pundits predict much, but whatever the outcome, their predictions may very soon be forgotten. Economic models may, with hindsight, be wildly optimistic or inaccurate, but by the time “hindsight” is raised as a debating issue, the original set of parameters may have become completely irrelevant.

The history of biofuels since the early 1970s exhibits such cycles of optimism and pessimism, of exaggerated claims or dire prognostications; a series of funding programs have blossomed but — sometimes equally rapidly — faded.2 The prime mover in that sequence of boom and bust, evangelism and hostility, newspaper head­lines and indifference, has invariably been the market price of oil. However undesir­able a driver this is in the ongoing discussions on the development of biofuels, from the viewpoint of the biotechnologist in the scientific research community, it can never be ignored.3 Even with supporting arguments based on energy security and ameliora­tion of greenhouse gas emissions, a high cost of any biofuel relative to that of gaso­line, diesel fuel, and heating oil is the main plank in the logic used by skeptics: that however worthy are the goal and vision of biofuels for the future, they simply can­not be afforded and — in a sophisticated twist of the argument — may themselves contribute to the continuing deprivation of energy-poor nations and societies while the energy-rich developed economies impose rationing of fossil fuel use and access to maintain their privileged position. Although lobbyists for the global oil industry clearly have a vested interest in continuously challenging the economic costs of bio­fuel production, an underlying fear that, whether significant climate change could be lessened by the adoption of biofuels for private transportation (a debatable but quantifiable scenario — see chapter 1, section 1.6.2) and whether “energy security” is simply a novel means of subsidizing inefficient farmers to grow larger and larger harvests of monoculture crops to maintain agricultural incomes and/or employment for a few decades more, only a clear understanding of the financial implications of biofuels can help fix the agenda for rational choices to be made about investing in new technologies across the wide spectrum of rival possible biofuel options in the twenty-first century.

It is, however, undeniable that oil price volatility can shake the confidence of any investor in bioenergy. In the two decades after 1983, the average retail price for gasoline (averaged over all available grades) was 830/gallon, but transient peaks and troughs reached 1290 and 550, respectively (figure 5.1). Slumping oil prices almost wiped out the young sugar ethanol-fueled car fleet in Brazil in the 1980s (chapter 1, section 1.2). Since 2003, the conclusion that the era of cheap oil is irreversibly over has been increasingly voiced as the demands of the burgeoning economies of India and China place unavoidable stresses on oil availability and market price.4 If accu­rate, that prediction would be the single most important aid and rationale for biofuels as a commercial reality.