|
|
Critics claim that using land for fuel pushes up food prices and risks food shortages
|
Biofuels are becoming a boom industry across Latin America, but questions are being asked about their long-term sustainability.
Biofuels are moving into the fast lane, almost literally. Come the 2008 Formula One season, AT&T Williams’s racing cars will be fuelled by a biodiesel blend produced by the Brazilian energy company Petrobras.
The boom in biofuels, which are dominated by ethanol and biodiesel, owes its origins to their low cost and clean credentials when compared with traditional fossil fuels.
According to Ethicalcorp.com, as a region, Latin America is well positioned to profit. Vast areas of agricultural land, fertile soil and cheap labor lend themselves to bumper crops of biofuel basics such as sugar and soya beans.
It’s a formula Brazil has been taking advantage of for more than three decades. A state-led alternative fuel program initiated in the 1970s is, as crude oil prices soar, proving its mettle. More than eight out of ten new Brazilian cars have “flex fuel“ engines, meaning they can run on ethanol-based biofuel or standard petrol. In the sugar-producing south of Brazil, there are an estimated 400 ethanol plants in operation.
Brazil’s domestic consumption of ethanol (derived mostly from sugar and the core ingredient of its biofuel mix) is set to rise from 14 billion litres in 2006 to 39 million litres in 2012. Petrobras forecasts that use of the “green gold“ will outstrip that of gasoline in Brazil by 2020.
Investors are now looking elsewhere in the region for biofuel opportunities. For their part, most Latin American governments are only too happy to open the door.
Argentina passed new biofuels legislation in early 2007, offering tax breaks and other financial incentives to biofuel producers. The new law is geared towards a 5 per cent biodiesel and ethanol requirement in diesel and gasoline by 2010.
Other countries looking to build their domestic biofuel markets include Costa Rica, Colombia, El Salvador, Jamaica, Venezuela, Peru, Paraguay and Ecuador. Even Cuba and Venezuela, whose leaders have lambasted the use of crops for fuel, enjoy a shared accord to develop ethanol from sugar. The only country so far to shut the door is Mexico, where a presidential veto blocked a proposed bioenergy law in October.
The biofuel boom is by no means a long-term certainty. Critics claim that using land for fuel pushes up food prices and risks food shortages. Others blame biofuel crops for environmental damage such as deforestation, water scarcity and soil erosion.
In October, the UN Special Rapporteur went as far as declaring biofuels a “crime against humanity“ because of its price impact on cereals and other food stuffs. Prices of maize, for example, hit a ten-year high earlier this year Ð a direct effect of the rising demand for biofuels, the UN’s Food and Agricultural Organisation maintains. The UN’s Rapporteur has called for a five-year moratorium, giving time to scientists to develop biofuels from non-food crops.
In Latin America, opposition to biofuels also has a political tint, especially among anti-US countries such as Cuba and Venezuela. They have painted this year’s agreement between the US and Brazil to promote biofuel production (as we reported in June) as American imperialism. For its part, the US wants to diversify its energy supply to avoid having to rely on hostile Latin American leaders such as Hugo Ch?vez for oil.
Less reported, but perhaps of longer-term concern for investors, are the latent structural problems in the biofuel market. Despite high oil prices (an incentive in the search for fuel alternatives), Brazil remains the only country in the world in which ethanol producers do not currently depend on state support, be they direct subsidies or tax breaks and import tariffs.
In 2006 alone, government subsidies for the ethanol market reached
seven billion dollars, according to recent estimates from the Organization for Economic Co-operation and Development.
In addition, as the price of agricultural staples increases in many parts of the world, the relative cheapness of biofuels compared with traditional fossil fuel decreases. The cost of biofuel crops, such as maize and rapeseed, could increase by 20-50 per cent by 2016, the OECD reports.
Investors and producers are wary as higher input prices eat into biofuels’ profitability, warns Robert Vierhout, secretary-general of the European Bioethanol Fuel Association.
Industry observers are also concerned that the biofuel boom might be leading to a problem of temporary over-supply, most notably in the case of biodiesel.
Latin America knows all about commodity booms and busts. Social and environmental issues aside, if the market fundamentals cannot be made to work, biofuels could well suffer the same oscillating fate.