At a time of record $88 oil prices you’d imagine that a business sector founded on supplying an alternative to diesel and gasoline is well-placed. Not so.
The criticism has been building for some time, but I think it’s safe to say the global biofuel industry is now in deep trouble.

The problem for the industry is that bad press and poor performance are now such that the government support it depends on is starting to look precarious. Pull out the credits, grants, tariffs and soft loans and the whole sector would come tumbling down — at least in the United States and Europe.

Just look at the damage the introduction of biofuel taxes has done to the German industry this year. It’s crippled, running at less than half-capacity.

Biofuels are derived from plants, especially food crops like rapeseed, palm oil, sugar cane, corn (maize) and wheat. As a result, they can be sourced locally, cutting dependence on foreign oil imports. They are also meant to help fight climate change. Burning biofuels only releases the heat-trapping carbon dioxide that the plants they’re derived from took from the atmosphere in the first place when they were growing.

So far, so good, right? That’s just the problem. Biofuels problems stem directly from why they are so attractive, those convenient motives that have prompted aggressive U.S. and European subsidies to support them. Now they’ve become a victim of their own success: a boom in U.S./EU production has hoovered up crop supplies and created a glut on the market, squeezing profits between higher prices for corn, wheat and so on, and lower prices for the end product.

The result? Take a look at the share price of almost any European or U.S. biofuels company — many are at or near 52-week lows.

Wise investors saw that coming and have been pulling out of the sector for the past 12 months. But now other issues are hitting, too. Green groups have long blamed biofuel production in Indonesia for rainforest slash and burn, which threatens the orangutan, while human rights groups have said the biofuel boom is also responsible for raising food prices, threatening the poor.

Those voices have been joined by some of the world’s most reputable analysts and thinktanks. The U.N.’s FAO and the OECD said this summer that biofuels will push food prices above long-term levels over the next decade. Earlier this year the International Energy Agency (IEA) called for an end to aggressive biofuel targets. It was joined last month by a report commissioned for the OECD and yesterday by analysts “Oil World”.
Meanwhile in August Nobel laureate chemist Paul Crutzen said almost all biofuels actually contributed more to climate change than oil.

The industry has tried to fight back, but the meekness of its counter-offensive, to me, only highlights the trouble they’re in. They counter the Crutzen report findings with other reports, and pick over individual numbers rather than dispute the thrust of his findings. Meanwhile they blame a hike in food prices on bad harvests and rising demand, saying the contribution of biofuels is exaggerated, that it’s all about “choices”, and that biofuels have been made a scapegoat. That could all well be true, but it doesn’t deny the underlying problem.

Most worrying perhaps for the sector is its fixation on new technologies to save the day — and especially extracting ethanol from wood chips and straw. Such technologies would by-pass the food versus fuel problem and could be very efficient, thus cutting carbon emissions, too. Almost every day a company says they’re targeting production to start in the next four to five years.

But the IEA says 10 years is more realistic, and a recent report by the OECD pointed out the logistical problems of hauling timber around the world — as an alternative to pumping oil through pipelines. The end result is that this emerging sector, so recently feted by President George W. Bush, is staring at the possibility that it may in the end be only a niche solution in the fight against climate change and fuel dependency.