By John W. Schoen Senior producer
updated 8/25/2005 3:24:07 PM ET 2005-08-25T19:24:07

In a small building in an industrial section of Staten Island, N.Y., in the shadow of New Jersey’s massive complex of oil refineries, Marty Baruso is working on the frontier of helping motorists cope with relentlessly rising fuel prices.

Baruso, an industrial chemist, originally got into the energy business setting up off-the-grid generators for businesses looking to beat New York city power prices of as much as 20 cents a kilowatt hour, among highest in the nation. To run those generators, he set up a few vats to brew biodiesel, a renewable fuel made from vegetable oil. Aside from being renewable, biodiesel has other things going for it: it produces no sulfur or soot when burned.

A year ago, his biodiesel plant was running at less than its 15,000-gallon-a-day capacity, largely due to distribution roadblocks. To sell his fuel to customers, he had to first find an oil dealer who would blend his product with conventional diesel.

But with the price of oil approaching $70 a barrel, Baruso’s fortunes have changed. He’s selling all the biodiesel he can make. He's about to close on a new facility in Brooklyn that will produce 8 million gallons of fuel a month. Now, the oil dealers are coming to him.

“We made our first sale this past two week to heating oil companies that are using it to blend with (oil-based heating oil),” he said. “We’re cheaper than petroleum.”

With oil refineries running at 95 percent capacity and pump prices soaring, businesses and consumers alike are scrambling for alternatives. Today, biofuels -- gasoline and diesel made from a variety of crops -- are the only non-petroleum energy source ready to pump into the empty tanks of the hundreds of millions of cars and light trucks on the road worldwide.

As old as fire
Biomass, a wide energy category that includes everything from wood to garbage to fuels brewed from plants, is often touted as an energy source of the future. But plant-based energy sources have been used for millennia -- ever since man first figured out how to start a fire to keep warm and cook dinner. In the U.S., wood was the primary energy source until after the Civil War, when coal became an '"alternative" fuel for heating and transportation.

When the first diesel engines came along at the end of the 19th century, they were originally designed to run on vegetable oil. But as petroleum (the alternative fuel at the time) began replacing increasingly scarce whale oil for lighting, oil soon proved to be too cheap, too convenient and too plentiful for other transportation fuels to compete with.

Now, the relentless rise in oil prices has sparked new demand for biofuels like ethanol and biodiesel. But it’s not clear how big a role biofuels will play in replacing petroleum oil over the long-term.

Proponents of biofuels argue that they are the best, readily-available, renewable substitute for gasoline and conventional diesel. By increasing demand for feedstocks like corn and soybeans, biofuel production also helps create new markets for American farmers. 

One of biofuel's strongest proponents is Amory Lovins, chief executive officer of Rocky Mountain Institute, a think tank that has assembled a detailed plan, Winning the Oil Endgame, to wean the U.S. from oil. Combined with increased efficiency — in everything from vehicles to power plants — Lovins' roadmap for energy independence includes a boost in ethanol production to cover 25 percent of fuel consumption, relying on wood and other waste cellulose to expand output of biofuels.

“You would get the country completely off oil, revitalize the industrial and agricultural economies and save about $70 billion a year net,” said Lovins.

But opponents argue that ethanol and biodiesel can now compete with gasoline and diesel at the pump only because they are heavily subsidized with tax dollars. Federal subsidies and tax breaks amount to as much as $1 a gallon for biodiesel and 51 cents a gallon for ethanol. Some states provide additional incentives.

And some skeptics argue that making biofuels like ethanol doesn’t save even oil.

“There are many in the energy community who believe that the amount in the oil that you use to produce a gallon of ethanol is about the same as you get out of it once you’ve made it,” said Ryan Wiser, a scientist at Lawrence Berkeley National Laboratory who specializes in the economics of renewable energy.

Questions of economics and energy efficiency aside, even biofuel's most enthusiastic proponents acknowledge that it would take decades to boost production enough to satisfy America's growing thirst for transportation fuel.

Though biomass provided all of the energy for the U.S. economy two hundred years ago, today it is just an asterisk in the accounting of a global energy economy dominated by fossil fuels. Even when lumped in with geothermal, wind, and solar, renewable energy sources account for about 2 percent of energy consumption worldwide, according to the U.S. Energy information Agency.

“We’re a ripple on an ocean of oil,” Baruso said of biofuel makers.

But in a few countries, aggressive promotion of biofuels have begun to pay dividends. In Brazil, the world's leading producer of ethanol, about a third of the fuel used by cars and trucks is ethanol made form sugar cane. The government continues to promote expansion of production, and now exports 500 million gallons a year to a dozen countries, including the U.S.

The advantages of biofuels are fairly straightforward: As a renewable resource, fuel produced from crops like soybeans could help ease the nation’s dependence on foreign oil. With the largest output of oil-producing crops in the world, the U.S. is well suited to make fuels from biomass.

Biofuel is also the only renewable out there that’s ready to go as a substitute for the liquid fuels that power the vast majority of internal combustion engines on the road today. One of the reasons gasoline and diesel have proven so difficult to replace is that they are hard to beat as transportation fuels. They're extremely energy-dense liquids, stable at normal temperature and pressure, and relatively safe to transport and dispense at filling stations.

That’s why, proponents argue, biofuel could potentially have the biggest and most immediate impact on U.S. reliance on foreign oil. Other energy alternatives — like wind, solar, nuclear, or even cleaner-burning coal — are primarily used to make electricity. Until electric drive train vehicles become commonplace, these power sources will replace little of the oil consumed in the U.S.

Like making moonshine
The biggest source of biofuel by far is ethanol — a liquid distilled from corn or other starchy crops. While various feedstocks and methods are used, the basic process relies on fermentation to produce ethanol and carbon dioxide — not unlike the making of moonshine. (Biodiesel uses a somewhat different process: Vegetable oil or animal fat is combined in large vats with a catalyst such as methanol; the mixture is then heated and a glycerin byproduct is removed, leaving behind the fuel.)

Demand for ethanol got a big boost over the past five years as an additive for so-called reformulated gasoline blends used to cut air pollution in the summer months. Much of that demand comes as refiners have phased out MTBE, a widely-used additive that has been banned in many states after it was found to have contaminated water supplies.

Though most ethanol and biodiesel is blended with gasoline and diesel, some newer-model vehicles can burn pure biofuel with only minor modifications. But pure biodiesel does have some performance drawbacks, according to a Department of Energy Report published last year, including lower fuel economy than conventional diesel, operating problems in cold weather, and increased emissions of nitrous oxide. Pure biodiesel can also break down some engine parts, like rubber tubes and gaskets. (That's one reason it's mixed with conventional diesel.)

The most contentious issue surrounding biofuels is whether they, in fact, save oil. One of the leading critics of government subsidies for biofuels, Cornell University professor David Pimentel, recently published research showing that it takes 29 percent more fossil fuel energy to produce ethanol from corn than the energy it replaces. Biodiesel made from soybeans didn't do much better -- requiring 27 percent more fossil energy than the resulting fuel produced.

Critics of Pimentel's work point to other studies showing biofuel's energy benefits. Pimentel counters that those studies don't take into account all the fossil fuel energy needed to make biofuels.

Nonetheless, biofuels have enjoyed widespread support in Congress, owing to the wide-ranging political clout of the farm states that benefit from increased demand for corn and soybeans. Though most of the tax breaks and subsidies in the $14.5 billion Energy Policy Act of 2005 went to oil and gas producers, farmers and biofuel makers won support for generous biofuel subsidies, tax breaks, grants and loans.

The law also calls for more than doubling ethanol production by 2012 from last year's level of 3.4 billion gallons, which was more than double 2000 levels. To help boost production, the government expanded tax breaks for smaller ethanol producers, set aside grants to research new production techniques and provided grants and loan guarantees to expand production of ethanol from sugar cane in Hawaii, Florida, Louisiana and Texas.

All of which will generate an estimated $70 billion in spending on goods and services required to produce ethanol over the next decade, along with $6 billion in new investment for expanded production capacity. Sales of corn, soybeans, and other crops for biofuels will total $43 billion over the next decade, according to the Renewable Fuels Association, an ethanol industry trade group.

That's been good news for big U.S. agricultural companies, who lobbied heavily for the extension of biofuel subsides and tax breaks in this year's Energy Policy Act.

"Across the world and across the country, (with) a variety of different vegetable oils, these high energy costs of petroleum prices are driving a lot of interest in biodiesel as well as in ethanol," Archer Daniels Midland CEO Wayne Andreas told Wall Street analysts last month on a conference call to announce that profits had more than doubled to $1 billion in the latest fiscal year.

But while biofuels are attracting more interest and generating more profits for farmers and fuel processors, they're not likely to have much impact on U.S. gasoline prices in the short term. The reason: There’s nowhere near enough biofuel production capacity to make a dent in gasoline consumption.

Last year, U.S. cars and trucks burned through some 3.6 billion gallons of ethanol — compared to about 140 billion gallons of gasoline. That’s means ethanol provided about 2.5 percent of the motor fuel consumed.

So why not just make more? Even over the long term, there are limits to how much biofuel production could be expended. Last year, the U.S. ethanol industry processed a record 1.26 billion bushels of corn into ethanol, about 11 percent of the nation’s total harvest. So even if the entire U.S. corn crop were diverted to ethanol production, total output would still account for less than quarter of gasoline demand. And ethanol's critics argue that converting an ever larger share of the U.S. corn harvest into ethanol will eventually drive up food prices.

Biodiesel producers in the U.S., meanwhile, cranked out about 25 million gallons last year, according to the National Biodiesel Board, a trade group. Production capacity stood at 110 million gallons a year in May, which is forecast to nearly double by May, 2006. But that compares with total highway diesel fuel demand of about 136 million gallons a day. That means that even if biodiesel makers ran their production plants flat out, they'd only be able to supply 2-tenths of one percent of overall diesel demand.

Put another way: If you drove a truck from Portland, Ore. to Portland, Me., the share of fuel demand met by biodiesel would take you about 7 miles — barely outside the city limits.

So while biofuels may help slow the rise in gasoline prices — and may provide an important fuel source in the long run — they won't provide enough new supply to have a meaningful impact on supplies for at least the rest of the decade.

To boost production, some alternative energy analysts believe other crops may be better suited for making biofuels. Research is currently underway on improving production processes and using naturally growing plants that require less energy to produce.

"We have to move to energy crops, which are switch grass and other crops that don’t require much tillage or fertilizer or pesticides and we’re growing really well in research plots," said Dr. Marilyn A. Brown, Director of the Energy Efficiency and Renewable Energy Program at the Oak Ridge National Laboratory.

Other countries' biofuel programs may offer some lessons for U.S. makers. Brazil makes about 3.5 billion gallons of ethanol a year with sugar cane — about half the world's total output. Some 90 percent is used at home, where cars run on a 25 percent ethanol gasoline blend, the rest is exported. Brazil's president has been quoted as saying the country could double ethanol output over the next few years to meet demand from other countries.

Europe produces 20 times more biodiesel than the United States — largely because a much bigger share of European cars run on diesel. The EU recently forecast that biodiesel consumption will more than double by 2006 to about 29 million barrels. That's still a small fraction of the 2.1 billion barrels of conventional diesel consumed in Europe last year, according to the International Energy Association.

Still, the global growth in biofuel demand is attracting attention from some unlikely producers. A British firm named D1 Oils, which has developed a biodiesel process using an oil-rich crop called jatropha, is partnering with biodiesel producers around the world. The list includes a joint venture in Saudi Arabia that plans to begin making biodiesel by late next year. Expected output: Roughly 2 million gallons a year.

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