Higher Oil Prices: An Opportunity to Kick Start the Biofuel Revolution

Iran’s threat to close the Strait of Hormuz and worsening stability in Nigeria, America’s fifth largest oil supplier, are likely to lead to higher petroleum prices in 2012, contributing to greater instability in countries facing fuel shortages and nipping at the heels of America’s economic recovery. Yet, ironically, higher oil prices could also bolster U.S. energy security in the long term by continuing to spur commercial interest in alternative biofuels that will help move America beyond oil as the dominant source of liquid fuels.

As petroleum prices climb, biofuels will continue to grow in demand, helping develop a market for the still nascent industry by making those fuels cost-competitive with conventional oil. Demand from the U.S. military has already helped significantly cut the price of biofuels in just several short years. In 2009, for example, the U.S. Navy purchased its first batch of biofuel (about 20,055 gallons) at a cost of $424 a gallon. In December 2011, Secretary of the Navy Ray Mabus announced that the U.S. Navy would purchase 450,000 gallons of biofuel at $26 a gallon, a whopping 94 percent in savings compared to its initial purchase. And although $26 a gallon is still expensive when compared to the $3 or $4 a gallon that gasoline prices are hovering around today, biofuels are still in the research and development phase. As the technology matures in 2012 and moves toward commercial scalability, prices will continue to drop. And as oil prices contribute to higher gasoline prices, biofuels will move closer to price parity with petroleum and reinforce demand for alternatives.

Increased interest from the private sector will also help move biofuel development from R&D to commercial deployment. The U.S. Navy is only one customer (albeit a large one), and its demand for biofuel is not enough to develop a robust market to compete with petroleum at today’s prices. But as oil prices rise, interest from the private sector will spur the kind of demand that will help pull alternative fuels toward commercial development. In November 2011, Continental Airlines made history when it tested a 20 percent blend of algae-derived biofuel in a Boeing 737-800. And Continental Airlines’ parent company, United Continental Holdings Inc., said it would buy 20 million gallons of algae-based biofuel a year, starting as early as 2014. Other carriers have announced similar plans to operate on a biofuel blend, and greater interest from the private sector will help biofuel companies acquire the capital investments they need to scale up development.

All of this points to cheaper biofuels on the horizon. Although 2012 won’t be the year we see $3 or $4 a gallon for biofuel, that future is not far off. Energy analysts are optimistic that the industry is just a few short years away from an inflection point that will move biofuels from R&D to commercial deployment – perhaps as early as the next decade. But getting there begins in 2012. What we need to see this year is sustained demand for biofuels from the public and private sectors. The Obama administration’s effort to drive biofuel demand by announcing that the Departments of Agriculture, Energy and Navy will match, dollar-to-dollar, up to $510 million dollars in investments from the private sector is an important initiative that will need to be sustained in 2012 and beyond.

Higher oil prices throughout 2012 will regrettably cause the same economic and political angst Americans are accustomed to, but at the same – perhaps the silver lining – higher oil prices can incentivize continued investments in biofuels, both from government and the private sector. In the long term, those investments are crucial to moving the United States away from its outsized dependence on petroleum, a move that is long overdue.