The Rationale for Biofuels

MARK CROCKER AND RODNEY ANDREWS

Center for Applied Energy Research, University of Kentucky, Lexington, KY 40511, USA

1.1 The Rise of Petroleum

Biomass, for most of history, has been the primary energy source powering human development. This energy supply has taken various forms, including wood and dung for cooking and heating, charcoal for metallurgy, and animal feeds for food and transportation. With increasing concerns regarding human impacts on the environment, humanity is once again looking towards biomass resources to meet a significant portion of our energy needs. The challenges today in using biomass are many, but can best be related to scale and density. The scale of energy needed far exceeds all past demands; both the increasing world population and the energy intensity of modern life compound the need for energy as never before. Similarly, the distances over which energy is moved and the concentration of population into dense urban centers results in the need for fuels with high energy density to insure overall efficiency of use.

Over the past century, the developed world has enjoyed cheap and abundant energy supplies through the adoption of a fossil energy economy. The 1900s have been declared the "Petroleum Century", with both positive and negative connotations. The widespread use of petroleum allowed rapid economic expansion throughout the industrialized world, increasing national and personal affluence, and enabled the modern ideal of personal automobile ownership. With expanded automobile ownership came an increasing demand for liquid transportation fuels, a demand that led to a shift in primary production away from the consumer nations (chiefly the United States and Great Britain) to majority importation of fuels from more petroleum-rich areas of the world such as the Middle East and South America. As this shift from self-sufficiency to foreign dependence evolved over the latter half of the 20th century, the formation of the Organization of Petroleum Exporting Countries (OPEC) led to price stabilization and a nearly centralized control in oil output. However, in recent years, OPEC's market control has begun to wane, with expanded production in non-OPEC regions (including Central Asian Republics, Africa and South America) increasing worldwide supply of petroleum and limiting pricing pressures.

This trend away from OPEC dominance in production has been mirrored by a broadened international competition for access to energy, especially petroleum. The United States, consuming more than 25% of worldwide petroleum production by midcentury, was viewed as the dominant consumer to be appeased (or not) in price setting with the international standard for pricing being set in US dollars. However, as the 21st century opened, expanding energy demand in the developing nations, especially China and India with their very large populations, resulted in significant competition for access to petroleum internationally. This increased competition has led to a general upward trend in price and increased market volatility. As non-OPEC production has begun to decline, cooperation between international oil companies (who traditionally supply North America and Europe) and nationalized oil companies in the developing world, along with a renewed fear of OPEC dominance in control- ling worldwide supply, has resulted in a desire for decreased dependence on imported sources of energy.

Along with the increased affluence that resulted from the widespread use of fossil energy to power the economies of the western nations came undesirable environmental impacts related to the gaseous emissions from fossil-fuel combustion. At the turn of the century a general upward trend in global carbon-dioxide levels in the atmosphere was recognized. This led to international concerns over global climate change and other devastating impacts that might result from an increase in "greenhouse-gas" levels, chiefly carbon dioxide and methane, in the Earth's atmosphere. This concern is heightened when taking into account the scale and speed with which the developing nations of Asia are expanding fuel use, particularly petroleum and coal. As these nations adopt western ideals in vehicle ownership, petroleum usage will continue to rise, along with concomitant emissions from fossil-fuel combustion, if alternative fuels are not developed on a large scale.

1.2 Worldwide Demand for Liquid Fuels and the Impact of Non-OECD Asia

Worldwide, liquid fuels represent the most heavily utilized source of energy, as shown in Figure 1.1. The dominance of liquid fuels in the overall marketed energy portfolio is expected to continue well beyond 2030. This demand for liquids can be attributed primarily to transportation uses (see Figure 1.2), including automotive, marine bunker, and aviation fuels. Transportation demand for liquid fuels is unique in that demand is relatively unaffected by increases in price. The desire for personal transportation, Figure 1.3, well established in the Organization for Economic Cooperation and Development (OECD) member nations, is increasingly playing a significant role in determining worldwide demand for oil as the non-OECD nations begin to catch up in personal automobile ownership and industrialization of transportation, agriculture and manufacturing. Overall, crude oil demand is projected to grow by 1% per year on average over the next 2 decades, from 85 million barrels per day in 2008 to 105 Mbbl/d in 2030 (or, 4100 Mtoe to 5000 Mtoe; Mtoe = million metric tons of oil equivalent). Similar to overall energy demand, this growth is expected primarily in non-OECD countries, particularly China, India, and non-OECD South Asia (Figure 1.4), while the developed world will see an overall decrease in demand for traditional petroleum feedstocks. The transportation sector is expected to account for 97% of this increase.

To meet this demand, especially in the United States (the largest consumer of transportation fuels), biofuels are expected to play an increasing role in the liquid fuels mix. Biofuels production – biodiesel, ethanol, other alcohol fuels, and bio-oils – has grown substantially within the last decade, and is expected to accelerate over the next several decades from current levels of roughly 4 Mtoe to 133 Mtoe by 2030. This increase in demand is the result of many factors, including the increasing price of traditional petroleum fuels, increasing demand for fuels in the non-OECD world, the implementation of national policies directed at reducing importation of fuels, global climate change legislation favoring renewable over traditional fossil resources, and (within the developed world) a willingness among segments of the public to pay a premium for renewable or green fuels.

1.2.1 Increasing Price and Decreasing Supply of Petroleum

Non-OECD Asia currently dominates the growth in liquid fuels demand over the near term with the remainder of the non-OECD world beginning to similarly exert pressure on demand growth in the next few decades. The traditional markets for petroleum in OECD Europe and, especially North America, will experience significant upward pressures with respect to the cost of petroleum. While the average price for crude (as West Texas Intermediate, WTI) dropped significantly in late 2008 and again through 2009, the price is forecast to quickly rebound. Indeed, despite this drop from the all-time high of $147/bbl in June 2008 to approximately $40/bbl, within a few months the price quickly rebounded upward to end 2009 between $75 and $80/bbl. Longer term, the crude petroleum price will continue a steady increase to $130–140/bbl as a base price over the next several decades (Figure 1.5), with some estimates raising the projected price to as high as $200/bbl.

The International Energy Agency (IEA) has recently completed an analysis of world ultimately recoverable petroleum reserves suitable for liquid fuels production. The results of this analysis should give pause to both those predicting a near term "Peak Oil" event and those who believe sufficient reserves exist indefinitely. Essentially, IEA concluded that while nearly two-thirds of reserves remain in place, there will be an accelerated drop toward only one-half remaining by 2030. However, reserves of unconventional oil sources, such as tar sands and heavy oils, are very large and have only begun to be exploited. Assuming that current environmental and logistical constraints in their development can be overcome, these unconventional resources may play a significant role in meeting oil supply going forward, especially in North America. However, these new sources of oil will result in a sustained higher price for fuels, perhaps helping to accelerate development of the more cost competitive biofuels while possibly reducing overall demand for oil importation in the United States.

Overall, dependence on imports is forecast to grow for all consumer sectors except North America, where expansion of nonconventional oil resources (Canada) and biofuels (US) is projected to more than offset demand growth and reduce import dependence by 2030 back below 60%. Projections for world production of unconventional resources are seen to expand from well below 5 Mbbl/d in 2006, to as high as 18 Mbbl/d in 2030 depending on the price of petroleum (Figure 1.6). Even with an unexpectedly slow growth in the price of oil, unconventional production, including biofuels, is expected to grow to well over 12 Mbbl/d. Looking at projected North American production, it is of note that biofuels are expected to surpass the production from Canadian oil sands over the next two decades.

1.2.2 Instability in Supply and Production of Petroleum

A further pressure on worldwide supply of petroleum is the significant trend towards the nationalization of oil-production companies over the last decade, which is expected to continue. While some nationalized oil companies (NOCs) are effective, many, especially in the developing world, suffer from civil unrest, corruption, inefficiency and diversion of capital from the company to support social programs. As such, this trend toward NOC control of worldwide oil production tends to introduce an unacceptable level of production uncertainty, resulting in price volatility.

More significant has been the emergence of non-OPEC countries as the primary source to meet new demand growth over the last decade. Middle East OPEC producers have seen an overall decline in surplus production capacity, and the need to supply growing demand within their own region is eroding their ability to meet new demand growth in existing markets, as well as the emerging Asian demand. Non-OPEC producers were able to begin making considerable strides in cutting into the OPEC monopoly and by 2000 were producing more than 60% of world oil (Figure 1.7). Meanwhile, the continued decline in the number and size of new discoveries has driven up marginal development costs.

However, this reliance on non-OPEC oil production to meet new demand growth has been destabilizing overall, especially as these fields have begun to decline in productivity much more rapidly than the Middle East OPEC fields. Non-OPEC conventional production (crude oil and natural gas liquids) has been projected by IEA to peak around 2010 and then begin to decline slowly through 2030. Kazakhstan, Azerbaijan and Brazil are the only non-OPEC producing countries to see any significant increase in output. Non-OPEC conventional oil production is expected to drop by 330 thousand barrels per day (kb/d) between 2008 and 2011.

As the non-OPEC producers begin to lose production capacity (or, at best, the ability to meet new demand growth), the Middle East OPEC countries are expected to see a rapid expansion in exports through the next two decades (see Figure 1.7). This return to the majority of world oil being produced within the OPEC countries will likely result in an overall tightening of oil supply on the world market as competition for new supplies increases to meet demand growth in the non-OECD countries, particularly Asia, and OPEC is once again able to determine worldwide supply levels and pricing.

Of greater concern for OECD nations wishing to avoid dependence on foreign oil imports, and the associated volatility in consumer prices for transportation fuels, is the location of the Earth's remaining proven reserves of oil (Figure 1.8). Total proven world reserves of oil are up over the last few years, to 1.34 trillion bbl. However, the majority of these reserves are in politically unstable regions of the world, including the Middle East, Africa, and Eurasia, with the increase of 10.5 billion bbl in total oil reserves between 2007 and 2008 coming in large part as a result of higher estimates for Libya and Venezuela, as reported by OPEC. Further exasperating fears over political instability, the Central and South American regional reserve value (123 billion bbl) is dominated by the 99.4 billion bbl reported by Venezuela. While North America does have the second largest regional reserve base (see Figure 1.8), the majority of the endowment consists of Canadian oil sands (173 billion bbl). Further, it is unclear if environmental restrictions on the development of both conventional and unconventional reserves will limit access to development in North America over the long term. Such restrictions, which currently limit access to the Arctic and Coastal areas, may reduce the realization of full development of unconventional sources such as tar sands and oil shales as well.

At the rate of 2007 worldwide production, the world's proven reserves of conventional and nonconventional oil at current estimates would last about 51 years. As the economies of the world recover and the demand for oil increases, the reserve base becomes shorter if there are no new discoveries of significant fields. At the slightly increased 2008 production rate of 73 Mbbl/d, these reserves would last about 50 years.

1.3 Forecast for Biofuels

As world demand for liquid transportation fuels grows, the surplus production capacity of traditional petroleum reservoirs is approaching a vanishingly small margin, resulting in upward pressure on the global price of petroleum. Coupling this with increasing volatility in the price and uncertainty of supply, many national programs encouraging domestic production of fuels have arisen, typically focused on the use of domestic biomass resources to meet demand for liquids.

Global biofuels production expanded 37% between 2006 and 2007, to 0.7 Mbbl/d (34.1 Mtoe) in 2007, and reached 0.8 Mbbl/d in 2008, roughly accounting for 1.5% of total transportation fuels. Aggressive growth is expected to continue, driven primarily by new regulations and investment subsidies in the United States and, to a lesser extent, Europe. Despite the recent economic downturn, world use of biofuels is projected by IEA to recover in the longer term, reaching 1.6 Mbbl/d in 2015 and 2.7 Mbbl/d in 2030 (Figure 1.9). If these growth projections are met, biofuels would account for more than 5% of road transportation fuels by 2030, as well as meeting 1% of aviation energy demand. It should be noted that the Energy Information Agency (EIA) estimates for biofuels production are considerably higher than those of the IEA, primarily due to the prediction of a more rapid expansion of biofuels in North America.

1.4 Biomass as a Renewable Source of Energy

Biomass can be utilized for the production of process heat, steam, motive power, and electricity, and can be converted by thermal or biological routes into a range of useful energy carriers such as liquid fuels and synthesis gas. The term biomass is used to describe any material of recent biological origin and includes plant materials such as trees, grasses and agricultural crops, as well as animal manure and municipal biosolids (sewage). As a raw material, biomass is a nearly universal feedstock due to its domestic availability and renewability. Indeed, until the widespread utilization of crude oil as an energy source in the 19th century, biomass supplied the majority of the world's energy needs. In one sense, the situation has now come full circle: as outlined above, concern over the environmental effects of fossil-fuel combustion, as well as disquiet about dwindling petroleum reserves – coupled with increasing global energy demand – have brought about a resurgence of interest in the utilization of biomass as an energy source.