Friday, June 22, 2007

Biofuels no threat to Opec, says IEA


By Ed Crooks and Javier Blas in London

Published: June 7 2007 20:17 | Last updated: June 7 2007 20:17

Biofuels will provide only a small proportion of the world's demand for
fuel in the next decade, the developed countries' energy watchdog has
said in an attempt to reassure Opec that the need for oil will continue
to grow.

Claude Mandil, the head of the International Energy Agency, told the
Financial Times that, even in the worst-case scenario for the oil
cartel, there would be a "dramatic" need for an increase in production
by the Organisation of the Petroleum Exporting Countries.

"Opec has nothing to fear. Even in the most optimistic scenarios, the
contribution from biofuels would be very small," Mr Mandil said.

The oil producers' group has become increasingly concerned about efforts
in the US and the European Union to cut oil imports.

Opec ministers were appalled by the State of the Union address by
President George W. Bush in January, in which he said he wanted to
"dramatically reduce our dependence on foreign oil".

However, Mr Mandil said that even in the worst case for Opec, in which
consuming countries implemented policies to curb oil consumption, the
IEA forecast that global oil demand in 2015 would rise by close to 10m
barrels a day, to 94.8m b/d.

Demand for Opec oil would be 38.8m b/d in 2015, up from about 31m b/d
today, while biofuels would provide just 3m b/d. If the oil-consuming
countries did not put in place those further policies to encourage
biofuel production and fuel efficiency, Opec oil demand would be 42m b/d.

In the late 1970s western powers urged Opec to increase urgently its
production capacity as oil prices soared. But the same countries
invested in energy alternatives, including nuclear power and natural
gas, and energy-saving measures.

The result, according to Frédéric Lasserre, of Société Générale in
Paris, was that "Opec invested huge amounts of resources in new oil
production capacity, just to realise that when it came on line, in the
mid 1980s, the demand had evaporated".

Opec is worried now about repeating the mistake. The cartel is committed
to increase its oil production through more investment. But it has
warned: "As the world needs a security of supply, we need a security of

Opec argues that it is misleading to think the world can wean itself off
its need for oil. Abdalla el-Badri, Opec secretary-general, said: "We
have no objection to changes in the energy mix but there is not a magic
solution for oil."

Opec's initial investment of about $120bn (€89bn, £60bn) to 2012 is
already on the way, but a second wave of about $500bn will depend on new
demand trends. With consuming countries devoting more resources to
nuclear power, biofuels, clean coal and energy efficiency, some
observers say Opec is right to be concerned.

"Climate warming will play a key role in the future discussion of
western countries' energy mix and, in there, oil is not well placed,"
said Mr Lasserre.

The potential of the current generation of biofuels is severely
constrained by the competition with the food industry for feed stocks
such as corn and wheat.

"As the biofuel industry is set up today, there are pretty clear limits
to it," said Andrew Shepherd-Barron, an alternative energy expert at KBC
Peel Hunt.

"In about five years you have the possibility that we could make
biofuels in a completely different way, from cellulosic ethanol or
algae. But those technologies are unproven."

Even if there is a breakthrough to those "second-generation" biofuels,
Wood Mackenzie, the consultancy, estimates they might displace only up
to 4 per cent of world oil demand in the next decade. But even a
marginal change could have a powerful impact on the oil price.

Copyright The Financial Times Limited 2007

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