ODAC News

Wednesday 13 June

The Oil Depletion Analysis Centre

1/   Oilwatch Monthly - June 2007            (Rembrandt Koppelaar, The Oildrum & ASPO Netherlands, June 2007)

2/   Ghost Towns Appear in Spain as Decade-Long Boom Ends (Update2)  (Bloomberg, Wed 06 Jun)

3a/ Hubbert's Peak, The Question of Coal, and Climate Change    (Dave Rutledge, California Institute of Technology, May 2007)

3b/ Carbon Capture Makes US Coal Growth Uncertain     (Planet Ark, Tue 05 Jun)

4a/ Ethanol Boom Won't Threaten Food Supply – Analysts           (Planet Ark, Tue 05 Jun)

4b/ Rising pork prices in China signal pricier times worldwide        (International Herald Tribune, Fri 08 Jun)

4c/ Biofuels blunder - Massive Diversion of U.S. Grain to Fuel Cars is Raising World Food Prices, Risking Political Instability            (Lester R. Brown, Earth Policy Institute, Wed 13 Jun)

5/   Economic View: Self-interest will do more to cut carbon emissions than all the low-energy light bulbs in the world            (The Independent, Sun 03 Jun)

6/   Milk price soars as drought hits dairy industry            (The Times, Mon 11 Jun)

7a/ Report: China considers halting coal-to-oil projects due to energy, expense worries       (International Herald Tribune, Sun 10 Jun)

7b/ Coal-to-liquids - an alternative oil supply?       (IEA Open Energy Technology Bulletin, Tue 22 May)

8/   Turkey poses a new danger in Iraq     (International Herald Tribune, Fri 08 Jun)

9/   Drive on Biofuels Risks Oil Price Surge – Feedback    (Financial Times / Dr Mamdouh Salameh, Wed 06 Jun)

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1/         Oilwatch Monthly - June 2007     (Rembrandt Koppelaar, The Oildrum & ASPO Netherlands, June 2007)

http://www.theoildrum.com/node/2651

Comment: Oilwatch Monthly is a new oil analysis publication from Rembrandt Koppelaar, ASPO Netherlands. IN this issue (the second) he looks at the changes in global oil exports.

Article:    This edition focuses on exports of all fuel liquids including conventional + unconventional crude oil, natural gas liquids, lease condensates, gas-to-liquids, coal-to-liquids and biofuels. The June newsletter can be downloaded at this weblink (PDF size 1 megabyte).

Three main conclusions have been found based on available data from January 2002 to February 2007:

1) Total world exports of all fuel liquids have been on a plateau since the end of 2004, and declined slightly in the last year, despite production increases.

2) Liquids exports from non-OPEC countries as a whole have declined since the beginning of 2004.

3) OPEC liquids exports have increased until the end of 2005, followed by a short plateau after which a slow decline set in, mainly due to declining production in Saudi Arabia.

Next months edition will return to production data with the inclusion of the export assessment. A definite format for the newsletter is still being found at this stage. All suggestions for additional analysis and data inclusion next to liquids/crude oil production, stock and export data will be taken into consideration.

A permanent basis for the monthly newsletter has been made on the Oildrum under the following webadres: http://www.theoildrum.com/tag/oilwatch, with thanks to Super G. There all the previous editions can be found in order from newest to oldest. Feel free to use this newsletter in writing and communication as long as you cite the following: Rembrandt Koppelaar, Oilwatch Monthly June 2007, The Oildrum & ASPO Netherlands.

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2/         Ghost Towns Appear in Spain as Decade-Long Boom Ends (Update2)            (Bloomberg, Wed 06 Jun)

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ar3L878k5YM4

Comment:    The property market in Spain seems to have popped. The sums involved are of course huge: “Banks loaned 250 billion euros to developers last year, eight times more than in 1998, and 134.3 billion euros to construction companies, data compiled by the Bank of Spain show. They loaned 544 billion euros to homebuyers, four times the value of mortgages in 1998.”

Article:    Javier Usua and Ruth Graneda never got out of the car when they visited Sanchinarro and Las Tablas, two of Madrid's biggest new suburban developments. The concrete-block buildings and empty streets were all they needed to see.

``We came to look at apartments but found ghost towns,'' said Usua, a 27-year-old taxi driver. ``You'd need to drive miles for a loaf of bread or cigarettes and my girlfriend found it creepy and unsafe so we turned around and left.''

The abandoned developments are evidence of a housing glut that will lead to Spain's first decline in home prices since at least 1992, when the Housing Ministry started keeping records. Spanish builders constructed 750,000 houses and apartments last year, more than France and Germany combined, while annual demand runs about 60 percent of that, according to the Finance Ministry.

``The real killer of the housing market is the immense oversupply,'' said Gonzalo Bernardos, a professor of economics at the University of Barcelona. ``Prices are already unofficially falling.''

... Spanish home prices have more than doubled since 1998, exceeding growth rates in the U.K. and Ireland, two of Europe's fastest-growing markets. The increase has been driven by a drop in interest rates to less than 3 percent from about 15 percent as Spain adopted the euro, household incomes that swelled as women joined the workforce, and a surge in vacation home purchases by Northern Europeans, mainly Germans and Britons.

... Banks loaned 250 billion euros to developers last year, eight times more than in 1998, and 134.3 billion euros to construction companies, data compiled by the Bank of Spain show.

They loaned 544 billion euros to homebuyers, four times the value of mortgages in 1998. Bilbao Bizkaia Kutxa has introduced 50-year mortgages and Banco Bilbao Vizcaya Argentaria SA has started making 40-year mortgages. Bilbao Bizkaia also offers loans up to 100 percent of the appraised value. That means even a modest decline in home values, combined with rising interest rates, may result in higher foreclosures.

``The problem here is that people have this unshakeable conviction that prices simply cannot fall,'' Encinar said.

... ``Banks have lent a tremendous amount to developers who used the money to buy land and now they have no choice but to build houses on it to recoup their money to repay their own loans,'' said Pablo Gaya, head of analysis at Capital at Work Investment Partners in Madrid.

... Rate increases have a more direct immediate effect on Spanish families because 96 percent of mortgages in Spain are variable rate, compared with about 20 percent in the U.K. and 12 percent in the U.S.

... BBVA, Spain's second-largest bank, estimates that 700,000 new houses will be built in 2007, 100,000 less than the number finished in 2006.

``If housing starts continue at present levels, the chances of a price crash in the Spanish property market will increase significantly,'' said Mark Stucklin, head of Spanish Property Insight, a real-estate consulting firm in Barcelona.

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3a/        Hubbert's Peak, The Question of Coal, and Climate Change        (Dave Rutledge, California Institute of Technology, May 2007)

http://rutledge.caltech.edu/

Comment:    Dave Rutledge is an American researcher, based at the California Institute of Technology, whose research suggests that global coal reserves may be less than currently thought. The above link is for Dave’s research page which contains a PowerPoint presentation, and roughly the same slides are in the video version which you can watch on YouTube. As an example of a country that got its coal reserves wrong, Dave analyses what happened to the UK coal industry. Dave states:

“There is also a spreadsheet file there with the raw data and extra plots that do not fit in a presentation, together with a link to an archive webcast from a talk I gave at the University of California at San Diego on May 11. I was an undergraduate at Cambridge in the early 70's when the coal miners brought down the Heath government.  The critical part of this discussion is the British experience with coal, because it is the outstanding example of a country with major coal reserves that has gone through the complete rise and fall.  The American examples for Pennsylvania anthracite and Virginia are much smaller amounts of coal.”

Dave sent ODAC a more up-to-date copy of his PowerPoint presentation which will be put on the ODAC Bulletin Board tomorrow. The following text is from Dave‘s website.

Article:    Currently there is a vigorous debate about fossil-fuel production, and whether it will be sufficient in the future.  At the same time, there is an intense effort to predict the contribution to future climate change that will result from consuming this fuel.  There has been surprisingly little effort to connect these two.  Do we have a fossil-fuel supply problem?  Do we have a climate-change problem?  Do we have both?  Which comes first?  We will see that trends for future fossil-fuel production are less than any of the 40 UN scenarios considered in climate-change assessments.  The implication is that producer limitations could provide useful constraints in climate modeling.  We will also see that the time constants for fossil-fuel exhaustion are about an order of magnitude smaller than the time constants for sea level and sea-level change.  This means that to lessen the effects of climate change associated with future fossil-fuel use, reducing ultimate production is more important than slowing it down.

3b/        Carbon Capture Makes US Coal Growth Uncertain (Planet Ark, Tue 05 Jun)

http://www.planetark.com/dailynewsstory.cfm/newsid/42383/story.htm

Comment:    That I am aware of, this is a myth: “The United States has more than 200 years supply of coal”. This assumes the current rate of extraction will continue for the next 200 years. How likely/possible is that? No growth?

Article:    Growth in US coal use should pivot on the development of a technology utilities may have to adopt to cut greenhouse emissions, the head of the US Energy Information Administration said Monday.

Billions of dollars are at stake on how much coal the United States will burn in the future. The United States has more than 200 years supply of coal -- the world's largest -- and its production of natural gas, a competing fuel, is flat.

Coal emits more carbon dioxide -- the main gas scientists link to global warming -- than any other fuel. Coal-fired power plants generate about 50 percent of US power and the EIA has forecast that figure will expand to about 57 percent by 2030.

... There are about 12 US coal-fired power plants being built, the most in decades. Companies have plans to build about 150 new coal plants in total, though how many of those will be built is uncertain...

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4a/        Ethanol Boom Won't Threaten Food Supply – Analysts     (Planet Ark, Tue 05 Jun)

http://www.planetark.com/dailynewsstory.cfm/newsid/42398/story.htm

Comment:    The article concentrates on biofuel from sugar cane in Brazil, but it is corn-to-ethanol in the USA that is the main problem. And not a physical shortage of food, yet - although that is undoubtedly on the way, but the increasing price of basic foodstuffs such as corn that poor people cannot afford to buy.

Article:    Fears of world food shortages caused by booming use of sugar cane and corn to produce ethanol fuel for motor vehicles are overblown and politically motivated, analysts and politicians said on Monday.

Ethanol producers in Brazil and the United States have been defending themselves from warnings by Cuban President Fidel Castro and his Venezuelan counterpart Hugo Chavez that growing use of biofuels will worsen hunger in the developing world by encouraging farmers to switch from food crops.

But many agronomists and global political leaders argue that the world has enough arable land to ramp up biofuel production without risking the food supply.

... Some US economists have voiced concern that a surge in ethanol consumption in the United States could drive up the price of corn, the raw material for ethanol in that country.

But other economists say a temporary surge in corn prices does not portend a food shortage, arguing corn and sugar cane production for ethanol can grow significantly without encroaching on other food crops.

"There is enormous potential for growth because there is so much arable land, especially in Latin America," said Silvia Sagari, who heads the finance and basic infrastructure division at the Inter-American Development Bank.

In Brazil, already the world's largest sugar cane producer, cane accounts for less than 9 percent of the country's total planted area, according to the United Nations.

In Sao Paulo state, the heart of Brazil's sugar and ethanol industry, cane accounts for almost 20 percent of all planted area. But the state also has almost 10 million hectares of unused pasture land, some of which could be turned into cane fields to increase ethanol production…

4b/        Rising pork prices in China signal pricier times worldwide           (International Herald Tribune, Fri 08 Jun)

http://www.iht.com/articles/2007/06/08/africa/pork.php

Article:    Few things are as essential to the Chinese as their pigs.

From pork spare ribs and mu shu pork to char siu bao - barbecued pork buns - pork is a staple of the Chinese diet. So in this Year of the Pig, an acute shortage of pork has been national news, as butchers raise prices almost daily and politicians scramble to respond.

Steep increases for pork loins and bacon are the most tangible sign that after a decade in which prices have fluctuated but not moved significantly upward, inflation is creeping back into China. In response to this pressure at home, Chinese companies are starting to raise prices for exports, removing what has been a brake on inflation in the West.

With the global economy expanding at a robust pace, and prices rising in fast-developing countries like India and Mexico, central bankers and investors are becoming concerned. Interest rates are inching up in the United States and Europe as lenders demand that borrowers pay more to offset the erosion of buying power over time.

... Chinese officials offer several reasons for the high pig prices. The cost of animal feed has risen by one-quarter in the last year, partly because more corn is being made into ethanol and partly because more prosperous workers are eating more meat.

... Wu Lijuan, a Guangzhou resident who bought a small plastic bag of lean pork from Zhang, said that she was eating less pork and more fish as pork prices rose. But prices for chicken, beef, fish and eggs are also increasing sharply this spring, along with the higher cost of animal and fish feed, although rising not quite as fast as pork prices...

4c/        Biofuels blunder - Massive Diversion of U.S. Grain to Fuel Cars is Raising World Food Prices, Risking Political Instability        (Lester R. Brown, Earth Policy Institute, Wed 13 Jun)

http://www.earth-policy.org/Transcripts/SenateEPW07.htm

Comment:    This is a copy of Lester's Briefing before U.S. Senate Committee on Environment and Public Works. The article contains a link to interesting data on world grain and US corn production.

Article:    The escalating share of the U.S. grain harvest going to ethanol distilleries is driving up food prices worldwide. Investment in fuel ethanol distilleries has soared since gasoline prices jumped at the end of 2005. Once completed, distilleries now under construction could double U.S. ethanol output, turning nearly 30 percent of next year's U.S. grain harvest into fuel for automobiles. This unprecedented diversion of the world's leading grain crop to the production of fuel will affect food prices everywhere, risking political instability.

The U.S. corn crop, accounting for 40 percent of the global harvest and supplying nearly 70 percent of the world's corn imports, looms large in the world food economy. Annual U.S. corn exports of some 55 million tons account for nearly one fourth of world grain exports. The corn harvest of Iowa alone exceeds the entire grain harvest of Canada. Substantially reducing this export flow would send shock waves throughout the world economy.

... Converting the entire U.S. grain harvest to ethanol would satisfy only 16 percent of U.S. auto fuel needs.

... Since food aid programs typically have fixed budgets, if the price of grain doubles, food aid will be reduced by half.

... The stage is now set for direct competition for grain between the 800 million people who own automobiles, and the world's 2 billion poorest people. The risk is that millions of those on the lower rungs of the global economic ladder will start falling off as rising food prices drop their consumption below the survival level.

... There are alternatives to this grim scenario. A rise in auto fuel efficiency standards of 20 percent, phased in over the next decade would save as much oil as converting the entire U.S. grain harvest into ethanol.

... As the leading grain producer, grain exporter, and ethanol producer, the United States is in the driver's seat. We need to make sure that in trying to solve one problem-our dependence on imported oil-we do not create a far more serious one: chaos in the world food economy.

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5/         Economic View: Self-interest will do more to cut carbon emissions than all the low-energy light bulbs in the world     (The Independent, Sun 03 Jun)

http://news.independent.co.uk/business/comment/article2607327.ece

Comment:    Hamish McRae discusses an International Energy Agency graph that concludes “nearly half of the potential reduction in CO2 emissions can come from more efficiency in the use of energy rather than from changes in its production.” The gist of Hamish’s arguments is that if we want to reduce CO2 emissions, increasing efficiency would give equally good results compared to finding / pursuing alternative energy sources. He also mentions that with Peak Oil, we might not have much choice. However, some of the suggestions Hamish discusses are doubtful. For example:

“Switching from coal to gas is almost as helpful as switching to nuclear and, of course, much less contentious” – true, except that there is a global shortage of natural gas developing

Article:    If governments can't do it all [reduce carbon emmissions quickly], who will? In shorthand: technology responding to market signals. The official projections for global energy use show it rising inexorably for the next 20 years at least, with the three main fossil fuels - mineral oil, natural gas and coal - remaining the principal sources. If the more alarming projections for the supply of mineral oil prove true, peak oil production will be reached within the next 20 years.

That peak may come within the next five years if some of the more alarming estimates of future Middle East oil production prove true. Saudi Arabia seems to be cutting production at the moment: it is not clear whether this is from choice or through reaching production constraints.

If the oil supply becomes tighter, the price will rise further. There will be some substitution of other fossil fuels but there are practical limits to this, and making oil from coal is an inefficient process. There will also be some relief from biofuels but, as we have seen, using food crops to produce fuel pushes up the price of food for some of the world's poorest people. US subsidies for biofuels have been particularly ill-constructed, forcing up food prices in Mexico for little environmental gain.

What of other technologies, including wind, hydro-power and nuclear? There is huge hype but the total contribution is quite disappointing. Yet higher energy prices will force change. We know that, and while we don't know in quite what ways, we can make some useful guesses. The graph above shows some fascinating work by the International Energy Agency in Paris taken from a presentation by its sister organisation, the OECD, to the UN Commission on Sustainable Development earlier this year. Its most stunning conclusion is surely that nearly half of the potential reduction in CO2 emissions can come from more efficiency in the use of energy rather than from changes in its production.

... This big point here, surely, is while there is no magic wand to reduce carbon emissions at a stroke, there is much that can be done. Regulation and legislation will play a part but the greatest driver of change will be higher prices for energy...

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6/         Milk price soars as drought hits dairy industry         (The Times, Mon 11 Jun)

http://business.timesonline.co.uk/tol/business/industry_sectors/consumer_goods/article1913132.ece

Comment:    More food problems not related to oil or gas prices, but will add to the inflationary pressure already on food prices due to corn-to-ethanol in the USA. Higher interest rates are currently the favoured method of controlling inflation. Here in the UK the Monetary Policy Committee must be wondering how much higher it can raise interest rates before it knocks the wind out of the housing market.

Article:    The price of milk is soaring worldwide as a drought-stricken dairy industry struggles to meet surging demand for milk products in China and the Middle East.

A doubling in the price of wholesale milk over the past year is creating havoc among food manufacturers, prompting warnings about food price inflation in the UK. Aid organisations have also raised concerns about the depletion of government stockpiles of milk powder.

In the UK, the price of cream has risen 23 per cent over the past year and dairy organisations say that cheese prices will have to rise this summer.

The continuing drought in Australia, which has crippled the country’s dairy output, has raised the wholesale price of skimmed milk powder by 60 per cent in six months. Over the past year, the cost of skimmed milk powder, used widely by the food processing industry, has soared from $2,000 per tonne to $4,800 per tonne.

Butter is also becoming much dearer, rising from $1,800 per tonne to $2,550 per tonne, according to figures from the Milk Development Council.

Changing diets and rising living standards in Asia, notably in China and the Middle East, have caught international milk processors on the back foot. Greater wealth is leading to a change in the Asian diet, explained Carmen Suarez, chief economist at the National Farmers Union. “There is population growth and higher incomes, which leads to higher consumption of animal protein.”

So rapid has been the escalation in demand that the EU’s milk surplus has dried up and the butter mountain has been flattened. Historically, the European Commission has given European producers subsidies to sell dairy products into the world market.

“The markets have been so strong there is no amount [of milk and butter] in intervention,” Ms Suarez said. “For skimmed milk powder the EU has been able to export without subsidies for a year.”

While the disappearance of EU food mountains may be welcomed, aid agencies have given warning of the impact on the world’s poor. Much of the world’s stock of milk powder is sold to poorer countries.

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7a/        Report: China considers halting coal-to-oil projects due to energy, expense worries            (International Herald Tribune, Sun 10 Jun)

http://www.iht.com/articles/ap/2007/06/10/business/AS-FIN-China-Oil-From-Coal.php

Comment:    If China packs in CTL (coal-to-liquid), then the USA would be the only country contemplating major CTL programs. South Africa already produces some CTL, but expansion there is limited. The bottom line may well be that there is not enough coal to keep the world’s power stations running, and large CTL programs. Same as natural gas in fact – not enough gas for more than a handful of major gas-to-liquid refineries.

Article: China is considering halting efforts to make oil from coal due to concerns about the expense and energy demands, a state news agency on Sunday quoted an official as saying.

China is hoping to ease its rising dependence on imported oil by promoting alternative energy sources such as oil-from-coal and solar, wind and nuclear power.

China "may put an end to projects which are designed to produce petroleum by liquefying coal," the official Xinhua News Agency said, citing an official of the country's top economic planning agency.

"Liquefied coal projects consume a lot of energy, though the successful industrialization of liquefied coal could help reduce the country's dependence on petroleum," the official of the National Development and Reform Commission was quoted as saying Saturday.

The official also expressed concern about the expense and water demands of such projects, Xinhua said.

... The Chinese government announced plans in March to invest 100 billion yuan (US$13 billion; €10 billion) to build Asia's largest facility to make diesel fuel from coal.

The facility in the northwestern region of Ningxia would be due to start operation in 2020 and be capable of producing 75 million barrels of diesel fuel a year, according to news reports.

7b/        Coal-to-liquids - an alternative oil supply?      (IEA Open Energy Technology Bulletin, Tue 22 May)

http://www.iea.org/impagr/cip/index.htm   Open Energy Technology Bulletin

http://www.iea.org/Textbase/work/2006/ciab_nov/workshopreport.pdf          (WARNING – 9.3 Mb PDF file)

Comment:    The CTL workshop was held in Paris 02 Nov 2006, but the text below is from the IEA newsletter dated 22 May 2007. The document, nearly 10 Mb big, is packed full of interesting maps, diagrams, photos, graphs.

Article:    When oil prices are high, coal that is cheap and plentiful has good economic potential for conversion into liquid fuels for road transport. In China and South Africa that potential is already exploited and other countries are considering coal-to-liquids (CTL) projects. It is widely recognised by developers that CO2 capture and storage must be factored in if CTL is to play anything beyond a minor role in the future. Experience has shown that CTL projects call for major inputs of capital and technical expertise. So what role can CTL play in the drive for energy security whilst also meeting climate protection goals? At a Paris workshop last November, leading private- and public-sector stakeholders from numerous countries were able to compare notes on recent developments regarding CTL and review its prospects for the future. The workshop was organised in conjunction with the annual plenary meeting of the IEA Coal Industry Advisory Board (CIAB). A detailed report, containing presentation extracts, is now available on the IEA website.

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8/         Turkey poses a new danger in Iraq       (International Herald Tribune, Fri 08 Jun)

http://www.iht.com/articles/2007/06/08/opinion/edturkey.php

Article:    Absolutely the last thing Iraq needs right now is to have thousands of Turkish troops pour across the border into the country's one relatively peaceful region - the Kurdish-administered northeast. Turkey's government needs to know that it will reap nothing but disaster if that happens.

A huge military buildup is already under way on the Turkish side of the border, and Ankara has been issuing a flurry of angry charges that the Iraqi Kurds are providing sanctuary to murderous anti-Turkish guerrillas.

The Bush administration has rightly stepped up its warnings to Turkey not to attack. A Turkish invasion would not only embarrass the United States, which numbers the Kurds among its few allies in Iraq. It would add a whole new and even more dangerous dimension to the mess in Iraq.

It would infuriate Arabs, who would resent any Turkish return to areas once ruled by the Ottoman Empire. It would finish off any remaining hope of Turkey joining the European Union. And it would put a huge strain on Turkey's fragile democratic politics. In short, it would be a disaster.

Turkey does have a real problem. Guerrillas of the Kurdistan Workers' Party, or the PKK, have been striking into Turkey from their bases in Iraqi Kurdistan with growing impunity and effect, using plastic explosives, mines and arms that are readily accessible in Iraq. These strikes have roused powerful passions in Turkey, stoked by generals eager to regain their primacy over the civilian government of Prime Minister Recep Tayyip Erdogan, which military leaders loathe for its roots in Islamic politics. So far, Turkish forces have occasionally chased PKK rebels into Iraq, but they have always withdrawn.

Turkey's feud with the PKK is inextricably tied to other conflicts and rivalries inside Iraq. The most directly relevant is the tug of war between the Kurds, Arabs and Turkmens over the oil-rich region of Kirkuk. Ankara's fear of fears is that a quasi-independent, Kurdish statelet on its borders could embolden Turkey's 15 million-strong Kurdish minority to demand autonomy or independence.

Reining in the Turkish Army will take more than the warnings already issued by Secretary of State Condoleezza Rice and Defense Secretary Robert Gates. Turkey's leaders must understand that a major military operation in Iraq could touch off a series of regional wars and realignments that would harm Turkey far more than anything the PKK could possibly cook up.

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9/         Drive on Biofuels Risks Oil Price Surge – Feedback           (Financial Times / Dr Mamdouh Salameh, Wed 06 Jun)

http://www.ft.com/cms/s/aeb9a650-136e-11dc-9866-000b5df10621.html      (Original FT article)

Comment:    Feedback on last Wednesday’s FT article “Drive on Biofuels Risks Oil Price Surge” from Dr. Mamdouh Salameh. Dr Mamdouh G. Salameh is an international oil economist and consultant to the World Bank in Washington DC on energy affairs.

Feedback:   OPEC should not worry much about the drive to develop biofuels as an alternative to crude oil. The price of crude oil will continue to rise in coming years not because of biofuel production but because of the peak in conventional oil production, lack of sizeable new oil discoveries and tight production capacity.

Global biofuel production in 2006 amounted to 538,000 barrels a day (b/d) accounting for a mere 0.63% of the global demand for crude oil. This is projected to rise to 2% (2.27 mbd) in 2020 and 3.5% (4.45 mbd) in 2030. Even with the advances of cellulose ethanol technology, the volumes of biofuels production will not increase appreciably beyond that level.

Three factors, namely technology, geography and cultivable land are key to the development of biofuels as a viable alternative to crude oil. And while technology could evolve over time and become cost-effective, geography could not change nor could cultivable land expand appreciably in view of a growing world population.

In tropical regions with abundant water and land resources such as Brazil, the viability of producing ethanol from sugar cane is no longer in doubt. Still in 2006 Brazil managed to produce only 88 million barrels (241,000 b/d).  The picture is quite different for other regions. For the United States to replace just 10% (or 1.99 mbd) of transport fuel with biofuels using today’s crops and technology would require around 40% of cropland, land that is simply unavailable. Were this to happen, it will adversely impact on the US food production and the export of US food and agricultural products to the world. The prices of meat, chicken, animal feeds and food products are already going up in the US and also in China which already imports a huge amount of food materials from the US.

However, the greatest barrier to the widespread development of the biofuel industry is economics. Because biofuels are used primarily to replace gasoline or diesel, world petroleum product prices drive the commercial viability of biofuels to a large extent. World oil prices have the largest effect on the economics of biofuel production. If world oil prices remain high for a prolonged period of time, biofuel programmes have a better chance of becoming financially viable. However, if oil prices were to fall to $35/barrel for instance, this would pose a serious challenge to the financial viability of biofuel production without government subsidies. In Brazil, feedstock costs alone account for 58% to 65% of ethanol production.

However, having established that biofuels do not pose any threat to OPEC’s conventional oil production, it is prudent for OPEC to consider how much to invest in capacity expansion.

In February 2006, President Bush spoke of America’s oil addiction in his State of Union

address and said the habit must be kicked with a major programme of rehab. OPEC duly responded that the president’s proposal could have an impact upon their plans to invest in new production capacity, and so compound the problems for energy supply. Ministers said they feared a return to the situation in the 1970s and 1980s when billions of dollars were invested in capacity expansion and the oil price fell. The International Energy Agency’s (IEA) rosy hopes for future OPEC production will depend on OPEC members doubling investment in capacity expansion. But will OPEC double investment, knowing their biggest customer might go into rehab? Instead, they may decide to deposit the billions of dollars needed for major capacity expansion in the bank and only enhance capacity marginally to prevent the oil price rocketing and thus harming the global economy.

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