Is US biofuels policy a boondoggle?

Rice University's Baker Institute has issued a report that is sharply critical of US biofuels policy, arguing it wastes taxpayers' money without enhancing energy security or helping the environment.

The allegations are hardly new in a debate of critical importance to the oil industry, but they have seldom been so well documented. You can click

to view the full 134-page biofuels white paper, and

for a related 12-page policy report.

By now there is plenty of evidence that most so-called first generation biofuels, derived from traditional farm crops such as maize and soya beans, push up food prices and may even contribute to global warming by encouraging deforestation and through increased emissions of nitrous oxide, a potent greenhouse gas, from the breakdown of nitrogen fertilisers. They remain, however, the most competitive alternative to petroleum products for powering most forms of transportation.

So worried was OPEC about the potential threat to its members interests from biofuels that the oil exporters' organisation last year commissioned its own study on their impact on the environment and hunger. You can access it

. As we

, it concluded that first generation biofuels were harmful on both counts, while even second generation biofuels, derived from non-food plants and waste materials, would take decades to reduce carbon emissions.

Taking an economic approach, the Baker Institute found that ethanol, a biofuel produced in large volumes from US corn (maize), simply does not displace much petrol from American drivers' fuel tanks.

"All told, ethanol is only displacing the equivalent of about 185,000 barrels per day of gasoline," the report concluded. That compares with average US petrol demand of 9 million barrels per day.

Lest oil exporters cheer prematurely, the report's main recommendation, however, is not that the US should discontinue blending ethanol with petrol, but that it should substitute cheaper imports for home-grown supplies.

According to the Houston-based Baker Institute, the US government spent about US$4 billion in biofuels subsidies in 2008 to replace roughly 2 per cent of the country's petrol supply. The average cost for that was the retail price of petrol plus an extra $82 per barrel or $1.95 per US gallon.

How is that possible when US ethanol production in 2008 averaged

, equal to 6.7 per cent of petrol demand?

The answer, according to the report, is that the ethanol mostly displaced MTBE, an oxygenate or octane enhancer used to improve the performance of petrol in car engines.

MTBE has been banned in most US states over complaints of groundwater being contaminated by the suspected carcinogen. Ethanol, however, is not the only available substitute. Alternatives would have been used if ethanol production had not been subsidised, the authors argue.

They also took issue with the import tariff the US levies on imported biofuels. With imports unable to compete with ethanol produced from crops grown in the central US corn belt, expensive pipelines must be built to transport the fuel to major population centres on the US coasts.

Without the tariff, the US could draw more ethanol to its coasts. "The United States could very likely meet its target of 36 billion gallons of ethanol by 2022, largely through imports from Latin America," the report concluded.

The

(RFA), which represents the US ethanol industry, has alleged that the study was part of an oil industry campaign sponsored, in part, by

.

"A recent 'policy paper' from Houston-based Rice University and sponsored by Chevron seeks to continue the orchestrated campaign to limit, and ultimately eliminate, the use of biofuels to displace foreign oil," the association said in a rebuttal.

Sure enough, the Baker Institute in its biofuels white paper thanks Chevron for "generous support" of its research.

Nevertheless, considering that Chevron is itself in the biofuels business (it has an

), and that the Baker Institute has not advocated eliminating ethanol as fuel, we find the RFA's allegation quite strange.