http://msnbc.msn.com/id/8769619/site/newsweek/

By Stefan Theil
Newsweek International

Aug. 8, 2005 issue - A couple of years ago, when the cost of oil
started to soar, Joel Rosado didn't think twice. The owner of an
air-taxi service in Mineiros, Brazil, with a fleet of 12 planes, he
needed to do what he could to contain fuel costshe spends 20 percent
of his revenues each year on 300,000 or so liters of fuel. So he rang
up aircraft-maker Embraer, put in an order for the latest-model
single-propeller Ipanema plane and tanked upwith alcohol. Flying on
ethanol (a form of alcohol) distilled from sugar cane slashed the fuel
bill for his Ipanema by 40 percent, at no cost to performance. Now
Rosado is buying another brand-new Ipanema and plans to convert his 11
other planes to alcohol, too. The only problem: Embraer, the world's
first manufacturer of ethanol-fueled planes, now has so many customers
that there's a two-year wait list to convert gasoline engines to
alcohol. Embraer is now looking into converting the T25, a
military-training turbojet, to alcohol. "At this rate," says Embraer
executive Acir Padilha, "the gasoline motor is headed for extinction."
Story continues below  advertisement

Its demise is not restricted to the air in Brazil. The country's
sugar-cane fields now feed a network of 320 ethanol plants, with 50
more planned in the next five years. Most of Brazil's 20 million
drivers still tank up with fuel that is cut with 25 percent ethanol,
but a growing fleet of new-generation (flex-fuel) cars can run on
straight ethanol, which goes for as little as half the cost of gas at
every service station from downtown Rio to the remote Amazon outback.
To keep up with demand, local sugar barons and giant multinationals
will invest some $6 billion in new plantations and distilleries over
the next five years. And Brazilian ethanol tankers are plying the seven
seas, supplying fuel-hungry countries like South Korea and Japan as
they begin to diversify away from oil. No wonder there's talk of
Brazil's fast becoming "the Saudi Arabia of ethanol."

Unlike oil, however, no one country dominates the market for ethanol
and other so-called biofuels. In the United States, the use of ethanol
made from corn has surged, thanks to new clean-air mandates and a
fat federal tax credit. Production is almost as high as Brazil's,
doubling since 2001 and already replacing 3 percent of all transport
fuel. The energy bill passed by the U.S. Congress last week will double
ethanol production again. In Europe, Germany has become the world's
biggest producer of "biodiesel," a high-performing, high-octane
fuelthe German variety is made from rapeseedthat is cutting into
sales of regular diesel at the nation's pumps. In more than 30
countries from Thailand to India, Australia to Malawi, crops as diverse
as oil palms, soybeans and coconuts are being grown for fuel.
Venezuela, Indonesia and Fiji announced biofuel initiatives just last
week. They hope to emulate Brazil, which is revolutionizing both the
countryside and the auto industry.

Has the inevitable transition from petroleum to next-generation fuels
begun, right under our very eyes? Certainly no one expects oil to
disappear overnightor even in the next one or two decades. Even
after the recent surge, farm-grown biofuels like ethanol and biodiesel
still account for only a small fraction of fossil-fuel use, as do other
renewables such as wind and solar power. But thanks to skyrocketing oil
prices, worries about climate change and growing anxiety over the
future security of the world's supply of crude, the prospects for
ethanol and other biofuels to make major inroads in oil use are bright.
Even as much of the world has focused on hydrogen cars, which may still
be decades away, biofuels have, in the words of a Canadian report,
begun to pose "the first serious challenge to petroleum-based fuel in a
century."

The boom has some powerful institutions behind it. As governments
across the globe come to grips with global warming, biofuels are seen
as a pragmatic step toward reducing carbon emissions. A growing number
of countries now require biofuels to be mixed into the fuel supply, and
oil companies like Shell and British Petroleum have invested heavily in
response. Already, Shell has become the world's largest distributor of
ethanol through its global service-station network. Companies as
disparate as Du Pont and Volkswagen are jostling for a slice of the $20
billion-plus market. Farmers worldwide are enthusiastic about a big,
new outlet for their produce. Environmentalists hail the new fuel as
clean and sustainable. Whereas petroleum releases carbon that had
previously been trapped deep underground, the carbon in biofuels
emissions has simply been captured from the atmosphere by crops. Some
carbon and energy goes into productionfertilizers, transport,
distillingbut the net effect, biofuel advocates say, is an up to 90
percent reduction in greenhouse-gas emissions.

Serious questions remain as to whether biofuels can be successfully
scaled up to take on oil. Would there, for instance, be enough land on
which to grow energy crops without putting the squeeze on food
production? And will biofuels be able to take hold without tax credits
and subsidies, especially if oil prices head downward? Then there's the
politics of global trade. Already, powerful rich-country farm lobbies
are trying to prevent exports of biofuel from Brazil, Pakistan and
other developing nations. "There's no way to say where this will go,"
says Paris-based biofuels consultant Christian Delahouliere. "There is
too much complexity and politics involved to draw a scenario."

The politics may be complex, but the technology is straightforward.
Oil, after all, is itself a kind of biofuel. When plants are put under
tremendous pressure for millions of years, hydrogen and carbon atoms
rearrange themselves into molecules that, when burned, release abundant
energy. Oil is also extracted from most plants by pressing
thempeanut oil ran German engineer Rudolf Diesel's first
eponymous engine in 1897. Plantssugar cane, sugar beets or
grapescan also be fermented to produce alcohol. Like fossil fuels,
vegetable oil and ethanol are hydrocarbons that release their energy
when burned.
Story continues below  advertisement

Indeed, what makes biofuels so compelling is that conventional engines
can run on them. That means biofuels can be mixed into the existing
fuel supply (gasoline or diesel) and be distributed using conventional
gas stations. What's more, the biofuels component of what comes out of
the pump can be gradually increased as production revs up, says
Wolfgang Steiger, biofuels guru at carmaker Volkswagen. Combustion
engines can run on gas "stretched" with 10 percent ethanol or less with
no modifications. Higher concentrations require "flex-fuel" engines,
which automatically adjust fuel injection depending on the fuel mix
(more than half of all new cars in Brazil have them). Biodiesela
high-quality, clean-burning fuel remarkably similar to petroleum
dieselis made from the oil extracted from the seeds of plants like
soybeans or rapeseed, along with methanol (a type of alcohol) and a
catalyst. Conventional diesel engines easily tolerate 20 percent
biodiesel "stretching," and many are already warranted at up to 100
percent. Because biofuels "don't require anyone to reinvent the car,"
says Volkswagen's Steiger, they offer an advantage over hydrogen fuel
cells, a new and infinitely more complex technology.

This compatibility is why many countries have picked up on biofuels as
an easy way to reduce their import bill for oil. Thailand is building
over a dozen ethanol plants using sugar cane and rice husks for supply.
China has constructed the world's largest fuel ethanol facility at
Jilin. It uses corn, but Chinese biofuel distillers are also
experimenting with cassava, sweet potato and sugar cane. Besides very
closely studying Brazil's production methods, Beijing is reported to be
eying the idea of importing Brazilian ethanol as well. Japan has
already gone that route, signing its first 15 million-liter deal with
Brazil in May as a prelude to replacing up to 3 percent of Japan's
gasoline, which would generate a demand for 1.8 billion liters of
alcohol a year. Another boost to the burgeoning biofuels trade has come
from the European Union, whose goal of using 6 percent biofuels by 2010
would require a fivefold increase in the production of biofuel
cropsa gap other countries hope to help fill. Malaysia, for one, is
expanding oil-palm plantations and setting up biodiesel plants
expressly to serve the German market.

A global biofuel economy, with a division of labor favoring the most
efficient producers, is key to developing biofuels as a viable
alternative to oil. For many developing countries, year-round growing
seasons and cheap farm labor are a valuable competitive advantage
over cold, high-cost northern countries. Super-efficient Brazil now
sells ethanol at the equivalent of $25 dollars a barrel, less than half
the cost of crude. What's more, because parts of the sugar-cane plant
are used both to fertilize the fields and to fire up the distilleries,
Brazil uses much less fossil fuel to produce alcohol than Europe and
America. In those places, by contrast, ethanol and biodiesel cost $50
and up because of shorter growing seasons, lower crop yields, and
higher wages.

For either the United States or Europe to replace just 10 percent of
transport fuel using today's crops and technology would require around
40 percent of cropland. Southern countries growing sugar cane, on the
other hand, can get up to five times as much biofuel from each acre of
land. "Without too much effort, producing ethanol from sugar cane in
developing countries like Brazil and India could replace 10 percent of
global gasoline fuel," says Lew Fulton, biofuels expert at the
International Energy Agency. Malaysia, Indonesia and Australia are well
positioned to join Brazil as global suppliers of sugar-cane ethanol.

Yet this emerging global market in biofuels is running into some
serious political trouble. Developed-country farm lobbies are lending
biofuels a powerful momentum, but also demanding protectionist
barriers. "Everyone pretends [their enthusiasm] is for the environment,
but it's all about agricultural subsidies," biofuels expert
Delahouliere warns. To encourage biofuels, the EU pays farmers 45 euros
for each hectare of "energy crops" they grow. That gives European
farmers a big incentive to keep cheap foreign ethanol from entering
their market. When Pakistan got special access to EU markets in 2002
and began shipping ethanol, says Delahouliere, local farm lobbies
persuaded Brussels to change course and re-establish tariffs. The
United States also has a 50-cent-a-gallon import duty on Brazilian
ethanol. Even within the union, some European countries have raised
subtle protective walls. Almost every country has its own biofuel
standard with slightly different specifications.

The next generation of biofuels may be easier for northern countries to
produce economically. Instead of getting fuel from sugar or oila
tiny part of the total plantupstart companies are building new
factories that convert a plant's entire "biomass" into fuel. Present
fermentation technology leaves the cellulosea stiff material that
gives plants their structureas waste. (In the case of biodiesel, oil
is pressed from the seeds; the rest of the plant is discarded.) Last
fall, Canadian firm Iogen inaugurated the world's first commercial
plant that takes leftover straw from surrounding farms and turns it
into ethanol. The trick is to use genetically engineered enzymesonly
now becoming cheaply availablethat can convert the cellulose in
straw to glucose, which is then fermented to produce ethanol. Shell Oil
has invested $46 million for Iogen to complete a bigger facility that
will produce 200,000 tons of ethanol a yearat an estimated cost of
$1.30 per gallononce it goes online in 2008.
Story continues below  advertisement

In Germany, Volkswagen is financing Choren Industries, which is
developing a process to synthesize a premium-quality diesel fuel from
the cellulose in trees and straw. Cars at Volkswagen's Wolfsburg
headquarters already use the fuel from Choren's pilot facility, and a
commercial-size plant will go online in 2007. "This will drastically
cut the amount of land needed to produce biofuels," says VW's Steiger.

To produce fast-growing cropsall that counts is total plant mass,
not fruit size or seed countVolkswagen is financing research on
fast-growing willows and poplars, 50-headed sunflowers, and strains of
corn three times as high as normal. "Growing plants for mass will
change our landscape," Steiger says. According to a study released in
April by the U.S. Department of Energy's Oak Ridge National Laboratory,
the United States alone could use these new technologies to replace 30
percent of its current gasoline consumption by 2030without cutting
into food production or greatly changing land use.

The surprising news is that biofuels could help make hydrogen
unnecessary. Already, the much-touted "hydrogen economy" looks farther
away than everit may be 30 years before hydrogen plays any
significant role, says VW's Steiger. In the meantime, Brazil dropped
its alcohol subsidies in the late 1990s and now makes bio-fuel so
competitive it could trump gasoline at $25 a barrel. With the rest of
the world following Brazil, hydrogen is going to have to run fast to
catch up. "At the very least biofuels are a bridge toward the hydrogen
economy," IEA's Lew Fulton says. "But if you add increased use of
biofuels, other fuels such as gas-to-liquid and coal-to-liquid, and
finally add improvements in fuel efficiency, we may not ever need the
fuel cell at all." That would make biofuels a convincing alternative
indeed.

.