Analysis-Biofuels Back in Vogue as Iran War Triggers Oil Price Surge

Biofuels Regain Popularity as Oil Prices Surge Due to Iran Conflict

Biofuels Demand Surges Amid Global Oil Crisis

By Nigel Hunt and May Angel

LONDON, April 21 (Reuters) - Soaring oil prices in the wake of the U.S.-Israeli war on Iran are driving renewed demand for biofuels as the need to tackle a fossil fuel shortage outweighs concerns that using crops for fuel will drive up food prices.

The conflict has disrupted about 20% of the world's oil and gas supplies, which typically pass through the Strait of Hormuz in the Middle East Gulf. Crude prices are up more than 30% since late February, before the war started. In contrast, prices for corn, a key biofuel ingredient, have risen just 5%.

Biofuels as an Alternative to Fossil Fuels

Biofuels, made from any organic feedstock, are usually blended into gasoline or used to replace diesel. They become more economical when fossil fuel prices rise. They can also help keep prices down at the pump and reduce dependency on costly crude oil and fuel imports.

Asia's Response to the Oil Disruption

Countries in Asia, heavily dependent on Middle East oil imports, have sought to increase biofuel use since the war began. Asia buys about ​80% of the oil shipped through the Strait of Hormuz, which has largely been closed to shipping since the conflict began.

Vietnam and Indonesia Lead Biofuel Initiatives

Vietnam said in late March it would switch fully to ethanol-blended gasoline from April due to the energy price surge, bringing forward a previous target of June 1. Ethanol is produced mostly from corn or sugarcane.

Indonesia has said it will raise the mandatory blending rate for biodiesel made from palm oil to 50% from 40%. Indonesia is the world's largest producer and exporter of palm oil.

"In Asia, countries do look at biofuels that can be produced from locally sourced feedstocks as they can reach two goals at once - limit energy imports and increase profitability for farmers," Kpler biofuels analyst Beata Wojtkowska said.

Asian countries are trying to soften the impact on their economies of the war-induced energy price surge with measures like fuel rationing, shorter work weeks and alternating driving days.

"I expect the crisis to give the Asian biofuel sector a boost," International Sugar Organization senior economist Peter de Klerk said, adding that India was planning to increase the amount of ethanol blended into gasoline, while Thailand was also looking at its ethanol options.

Food Versus Fuel Debate Reignites

FOOD VERSUS FUEL

Measures to boost biofuel production and use, like crop subsidies and mandates, came under scrutiny in the 2007-2008 food price crisis, prompting a fierce debate amongst policymakers over food versus fuel security. Critics, including politicians, think tanks and non-profits, pointed to biofuels as a driver of rising food prices.

Impact of Biofuel Production on Food Supply

Biofuel production can take up a large amount of crops. About 40% of the corn in top grower the U.S. is used to make ethanol, while top sugar producer Brazil uses 50% of its sugarcane to make the biofuel.

The war-fuelled surge in energy, transport and fertiliser costs has already triggered a rise in world food prices, which hit a six-month high in March. Increased use of biofuels could potentially drive food prices higher still.

Current Market Conditions and Future Outlook

But Phil Aikman, Southeast Asia campaign director for non-profit Mighty Earth, said significantly higher food prices would only come about if biofuel makers build new plants at scale, which would take years.

Also, global grain and vegetable oil supplies are plentiful at present, so the food vs fuel debate has not been nearly as prominent as it was in 2007-2008.

Biofuels account for a fraction of global energy needs - meeting just 4% of transport fuel demand. Consultants BMI, a unit of Fitch, expect biofuels to meet 5% of transport energy needs by 2035.

As well as the time and cost involved in building new plants, fuel blending limitations and feedstock supply constraints would prevent a large and rapid growth in demand for biofuels, Kpler's Wojtkowska said.

"Biofuels can help ease (fuel) prices somewhat but not on a large scale," she said.

The EU Exception and Global Policy Responses

THE EU EXCEPTION

One outlier in the increase in biofuel consumption is the EU, where there is a cap on use due to concerns that using too much can drive up both food prices and deforestation rates, said Roger Bradshaw, an independent commodity specialist.

EU Renewable Fuel Obligations

The cap is part of the EU's renewable fuel obligation - which is aimed at cutting fossil fuel dependence.

Contrasting Approaches: U.S. and Brazil

In the U.S., by contrast, the Trump administration has ordered refiners to blend a record amount of biofuels this year.

In Brazil, the government is looking into raising the ethanol blend to 32% from 30% by end-June, while cane mills are set to use a larger proportion of the crop to make ethanol instead of sugar as the fuel is currently more profitable than the sweetener.

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(Reporting by Nigel Hunt and May Angel; Additional reporting by Bernadette Christina in Jakarta, Siddharth Cavale in New York and Oliver Griffin in Sao Paulo. Editing by Simon Webb and Jane Merriman)