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Biofuels not the answer, yet

Sustained high crude oil prices will lead to greater use of more expensive biofuels, but consumers will need yet more incentives for demand to really take off, producers and analysts said.

Biodiesel from vegetable oils and ethanol made from sugar or grain have the best prospects in economies most reliant on imports of crude oil, which hit record prices last week.

The United States, Japan and China are the world's biggest crude oil importers. Biofuel producers, like leader Brazil, are turning abundant biological feedstock into green fuels, but they remain some 50 percent more expensive than petrol.

"Fossil fuels are still cheaper than biofuels in general," said Peter Clery, chairman of the British Association for Biofuels and Oils, a lobby group. "As long as petrol is cheaper, bioethanol will not be used unless there is a government incentive or legislative requirement to use it."

U.S. light crude futures have jumped more than 40 percent this year to a peak of $49.40 a barrel last Friday, driven up by violence in Iraq and signs that demand growth remains strong.

If oil prices remain high for long, interest in ethanol as a fuel alternative will rise, and governments will be more likely to expand their ethanol incentive programs, said Sergey Gudoshnikov, economist at the International Sugar Organization.

Andrew Owens, CEO of British-based green fuel company Greenergy, said: "Globally, demand for biodiesel is growing substantially."

But more needs to be done. A senior London sugar analyst said: "It is up to politicians in various countries to accelerate consumption of biofuels. I think it will happen slowly, even though the jump in oil prices will put biofuels higher on the political agenda."
Supply, not demand

So far, however, production appears driven by biomass supply rather than consumer demand.

A new Illinois law will encourage use of corn-based ethanol by promoting "flexible fuel" vehicles and building of service stations supplying the mostly ethanol E-85 fuel in the state.

The Philippines is promoting use of a coconut-based additive and ethanol, derived from the country's projected sugar surplus.

In Thailand, ethanol has become more popular with motorists this year. Bangkok service stations often showed "empty" signs at containers of so-called gasohol, which comprises a mix of 10 percent ethanol and 90 percent petrol. But there is some resistance from major oil companies.

In Britain, supermarket chain Tesco said in April it planned to make biodiesel made with rapeseed.
Expansion takes time

But green fuel investments will take years to take off given the time needed to expand production capacity.

Greenergy and its European partner Novaol have unveiled plans to build Britain's first biodiesel plant to process up to 100,000 tons of home-grown virgin rapeseed oil a year.

Greenergy's Owens said he expected the plant to come on line in the spring of 2006.

In Germany, Oelmuehle Hamburg, a unit of U.S. agribusiness giant Archer Daniels Midland Co. (ADM: Research, Estimates), said last month it planned to double output of biodiesel at its mill in Hamburg.

Work should be completed in early 2006.

Editorial Notes: Money-cost only considered, no discussion of supply or net energy considerations. -LJ

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