Election Day: Amidst Shifting Geopolitical Realities, U.S. Biofuels Industry Seeks Policy Clarity

By Mackinnon Lawrence

As Americans head to the polls today, what appears to be a closely contested election is likely to turn on economic issues and competing visions for jumpstarting a tepid recovery since the 2008 economic crisis. With gasoline prices playing the role of bogeyman in the recovery, energy security continues to feature prominently in campaign rhetoric. Over the past decade, energy security has been biofuels’ “cause celébre”, but shifting geopolitical realities are likely to complicate this relationship in the next presidential term.

Embedded in each candidate’s blueprint for economic recovery is an ‘all-of-the-above’ energy strategy that calls for the development of a broad portfolio of domestic energy sources, including biofuels. But just as the U.S. biofuels industry faces a maelstrom of uncertainty and plateauing growth, neither candidate has offered much in the way of specific proposals around biofuels over the next decade.

A reshuffling of the old energy order

A lack of clarity around biofuels policy reflects a reshuffling of current geopolitical realities that belies nearly forty years of dependence on Middle East oil. According to a new report published last month by the UK-based international affairs think tank, Chatham House, reduced demand for petroleum throughout North America and Europe due to stagnant economic growth, increasing adoption of alternative technologies like biofuels, and a tightening of CAFE standards have altered the balance of geopolitical power around oil.

Data published by the Energy Information Agency (EIA) supports this view. In 2011, 45% of the petroleum consumed by the United States was imported from foreign countries, the lowest level since 1995. Just 16% of imported oil in that same year came from the Persian Gulf, while total imports from the region have declined 33% from a high of 1 billion barrels in 2001.

Meanwhile, as noted in the Chatham House Report, a corresponding acceleration of demand for oil in the Asia Pacific region has shifted concerns around supply vulnerability away from the West to fuel-thirsty countries like China and India. Traditionally, the United States and its allies have played a central role in securing the flow of oil from the Persian Gulf to protect their oil-guzzling economies from crippling supply disruptions. Now with fast-growing markets throughout Asia Pacific soaking up a greater portion of Persian Gulf oil, the U.S. finds itself in an awkward political conundrum: whether to continue policing the supply lines in the Gulf that now largely serve Far East interests or transfer responsibility to those nations with swelling interests in the region.

To date, the ‘independence from the Middle East’ rhetoric has proven largely effective at driving the biofuels industry’s meteoric growth over the last decade. Seven years ago, then-President Bush warned that the U.S. was “addicted to oil”and pledged to invest in alternative energy — including ethanol and alternative fuels — thereby reducing Middle East oil imports by 75 percent by 2025. President Obama, who has been in office during one of the most volatile periods for crude oil in modern history, expanded many of these investments and launched the most aggressive biofuels mandate in the world in the revised Renewable Fuel Standard (RFS).

The surge in biofuels supply

According to analysis by Pike Research, production of ethanol and biodiesel in the United States surged 182% between 2006 and 2011, reaching 15 billion gallons per year (BGY) last year. Although slowing in the past two years, the number of ethanol biorefineries deployed across the U.S. increased 115% over that same period. The percentage of ethanol blended with gasoline, meanwhile, increased from just under 4% to nearly 10% over that same period, offsetting roughly 9 billion gallons of gasoline per year.

Meanwhile, the biofuels industry’s role in ‘all-of-the-above’ in the name of independence from Gulf imports has become overshadowed by natural gas, shale, oil, and other domestic opportunities. For biofuels, future industry growth will turn on whether the industry can distance itself from the outdated rhetoric of Middle East dependence while galvanizing political will around reduced carbon emissions and sustainability, a direction Europe has embraced purposely.

It is likely that an Obama victory will result in a doubling-down on the RFS with possible carve-outs for gas-to-liquids (GTL) pathways. A Romney victory, meanwhile, provides less certainty with respect to specific policy pathways for biofuels, but would also likely benefit gas-to-liquids pathways.

Whoever wins the General Election, it is difficult to say whether biofuels can continue to thrive in the U.S. or whither as fossil sources potentially attract increased levels of investment. If the past is any indication, the next President would be remiss to ignore the expanding role biofuels have played in shifting the geopolitical landscape in favor of the U.S. and the opportunities for improved sustainability in the transportation sector.

As the Chatham Report notes, all major importing countries have adopted strong policies addressing carbon emissions and vehicle efficiency. Businesses outside of the oil sector, meanwhile, are anticipating more severe policies against carbon fuels and are innovating accordingly. To continue its historic growth, the U.S. biofuels industry will need capture the sustainability rhetoric in spite of the candidates’ obsolete calls for Middle East oil independence.

Mackinnon Lawrence is a Senior Research Analyst at Pike Research, A Part of Navigant. He contributes to the firm’s Smart Energy practice, with a focus on biofuels and emerging renewables.