Biofuels are set to transform the global economy, according to Harvard University economist Ricardo Hausmann, leading to the demise of the price-setting power of OPEC and the end of agricultural protectionism.

He argues that technology is bound to deliver a biofuel that will be competitive with fossil energy at something like current prices. The consequences of this will be that the large potential supply of biofuels will cap the price of oil because its supply is much more elastic.

Professor Hausmann also argues that the large-scale biofuel production will cause increases in the price of agricultural land and of food that will relieve governments from the current political pressure to protect the agricultural sector. This, he says, will boost sustainable development in poorer nations.

Can these predictions become reality? Which biofuels will become most widely used? What do such scenarios mean for carbon emissions and energy security?

Professor Hausmann answers your questions on Thursday 15 November 2007.

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How long would you estimate is the time frame to substitute a reasonable percentage (20-40%) of oil by biofuel?
Dr Dieter Schmidt, Aschau, Germany

Ricardo Hausmann: It is a good question. Assuming that there would be a clear sign that an international market for a clear form of biofuel would exist in the future, I can imagine a relatively swift response of agricultural output in Latin America. In a 15 year time horizon, I could imagine an additional output of something like the equivalent of some 3 million barrels of oil a day. That is less than 5 percent of current oil production, but it is only Latin America. An equivalent effort including DR Congo, Mozambique, Cameroon, Angola, Tanzania, Central African Republic could contribute something of the same magnitude.

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The increase in the price of food will also place hundreds of millions of people into worse poverty in a world where many face acute food shortages. Can you not see a scenario where a rush to grow biofuels leads to mass famine as landowners seek to take advantage of the higher prices on offer?
Simon Ryley, London

Ricardo Hausmann: First: Many agricultural policies have been geared at increasing, not lowering the price of food. That is why protectionism exists. In fact, much harm has been done to countries with the potential to plant sugarcane by the fact that sugar prices over the last 30 years have been incredibly low owing to protectionism in the EU and the US. These countries would observe a rapidly expanding agricultural sector.

Second: I am not sure which are the countries or crops that would lead to the massive famines you mention. Biofuels are not as cheap to produce relative to oil in many parts of the world, so I do not expect major changes in supply in those places.

Finally, I think it is important to distinguish between the rural poor who get their livelihood from agriculture and the urban poor. I think that it makes sense to think of the rural poor as mostly benefiting from the increased demand for labor in rural areas thanks to the expansion of productive possibilities. The urban poor may observe an increase in the relative price of food. But there are other effects that one must consider as well such as the lower equilibrium price of energy and the changes in the demand for labor (which may well rise) as a consequence of the development of the industry. I am not sure that these effects are large enough and clear enough to justify a ban on biofuels as recently called for by a UN human rights report.

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Agricultural protectionism has, among other reasons, an economic logic due to the volatile nature of the agriculture sector (e.g. weather). If biofuels become an important energy source, is it reasonable to assume that global economy will be able to maintain a steady and stable path if it leans on a volatile energy source? Are there policy tools to mitigate such a risk? And at what cost?
Enrique Fleischmann, Barcelona

Ricardo Hausmann: I disagree with the idea that much of agricultural protectionism is related to concerns about volatility. If that were the case, then interventions would take the form of price floors and price ceilings, which they do not. I think that on average the agricultural sector has been protected and subsidized by the rest of society in the EU and the US, which is not what you would observe if the problem was that of inadequate risk management mechanisms.

The existence of an expanding biofuels industry would be good for farmers’ income and should make their cries for protectionism less persuasive.

I do not think that global biofuels production will be any more volatile than global food production. However, since it would complement a very volatile energy sector, it should reduce the overall volatility of the energy market.

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Given that about 90% of human water use already goes into agriculture, the critical question is how would we find enough water to grow the biofuel crops?
Douglas Ibrahim

Ricardo Hausmann: I am not sure where the statistics on water availability comes from. The countries that have good biofuels land for production include Brazil, Argentina, Uruguay, Bolivia, Paraguay, Colombia, Venezuela, Belize, Angola, DR Congo, Central Africa Republic, Mozambique, etc. It is hard to argue that in those countries water is a constraining factor.

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How high do you think the oil price could go before biofuels begin to replace it?
Peter Goldsmith, London

Ricardo Hausmann: I think it is mostly an issue of time, not level. I think that at current oil prices, the check is in the mail. The incentives to expand biofuels and to invest in technology are overwhelming. But it will take time to find the right processes, coordinate auto manufacturing with fuel distribution channels and with an efficient market for biofuels. But I think these things will happen even if oil goes down to the 70 dollar range.

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Will big energy importers like Europe, the US and China negotiate environmental conditions on biofuel trade like the protection of important CO2 storing habitats such as rainforests and peat marshes, or will biofuel trade occur regardless of the environmental costs? Would sensible environmental conditions such as the above alter your argument that biofuels have a large supply potential?
Brendon Harre, Helsinki

Ricardo Hausmann: I am not sure that imposing restrictions on biofuels trade is sound, as no such conditions exist on fossil fuel trade. I do think that environmental issues should form part of the decision on how to organize production, but not trade. A second point: it is important to note that the CO2 contained in a stable rainforest is a stock. The biofuels that can be produced in that piece of land is a flow of energy. We should not confuse stocks and flows. It is perfectly possible that clearing forests to produce biofuels reduces the amount of CO2 in the atmosphere vis a vis an alternative scenario in which the same energy came from fossil fuels instead.

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What do you think are the main constraints - political and economical - for the biofuel program be successful at the world level?
Uziel Nogueira, Buenos Aires

Ricardo Hausmann: I think that the first problem is technological. We still do not have the right liquid biofuel and we do not know how to extract energy from cellulose in an efficient way. This creates uncertainty over what to produce and how. The second constraint is infrastructure: many of the lands we could put into production are not adequately serviced with roads and transport infrastructure. As these issues get cleared and if the price of energy remains at about the current level there will be a rapid supply response in much of the part of the world with the capacity to expand.

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Which biodiesel crop would you back as the principal environmental fuel source for the developing world?
Charlie Tryon, London, UK

Ricardo Hausmann: I don’t think we should make firm commitments at this stage. It is clear that sugarcane is much better than corn today. However, we still need to see the potential of cellulosic biofuels and algae are an exciting new possibility. Let’s encourage scientists and technologists to keep at it.

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Do you think the production of corn-based ethanol in the US is viable in the long-run? Or will more sophisticated biofuels be used instead?
Cameron, New Zealand

Ricardo Hausmann: I think there is broad consensus that corn is a rather inferior way of producing biofuels and that its environmental benefits are more limited than many of its alternatives.

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How much of this good quality land that is not being cultivated is tropical forest, and how much is arid and in danger of erosion if cultivated, as in Soviet Central Asia, when ’virgin land’ was ploughed with disastrous results?
Professor Felix FitzRoy, University of St Andrews, Scotland

Ricardo Hausmann: In our calculations, we were careful to include only land that is suitable given existing usable forms of biomass, so Central Asia does not appear as a particularly promising place in our calculations. If cellulosic technology allows for the efficient production of biofuels based on pastures such as switchgrass or elephant grass then the amount of available lands would go up.

Part of the areas we are considering as suitable are currently covered with forests. I am fully aware that there is a stock of carbon that is sequestered in the form of wood in those forests. But clearing a forest in order to produce biofuels generates a flow of carbon-neutral energy year-in year-out that must be compared to the stock of wood in the forest. From a net carbon emission point of view, if the alternative is to have burned fossil fuels, the production of biofuels from a cleared forest would still be better. This does not mean that it is the only environmental issue to consider. There are issues of bio-diversity that must come to the equation.

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Doesn’t the amount of petroleum required to produce the bio-product that would be converted to ethanol actually exceed the energy equivalent of the ethanol produced?
John Player, Texas

Ricardo Hausmann: If prices are undistorted, this would never be the case. It would imply that the cost of production exceeds the price of the output. However, if we start subsidizing biofuels production, this may very well be the case. There are plenty of dairy farmers around the world that feed re-liquified New Zealand powder milk to their calfs in order to be able to sell the milk from their cows at the highly protected domestic price. I think the biofuels industry will be able to make it with technology, infrastructure and clear markets. Not subsidies.

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Do you see government intervention (i.e. subsidies and or blended fuel mandates) as necessary for this transformation or is the reality of $100/barrel of oil enough?
William, Fresno

Ricardo Hausmann: 70 dollars a barrel is a pretty attractive target for ethanol to compete with - 100 dollars is a bonanza. I think we should focus on creating a real market for biofuels, one that producers can understand and trust. It is a waste of time and resources to talk about subsidies.

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Are biofuels an alternative to fossil fuel? Definitely, but aren’t alternative renewable sources, like solar, wind, tidal movement etc, also needed to play an important role?
Dr Pandi Zdruli, International Centre for Advanced Mediterranean Agronomic Studies, Valenzano, Italy

Ricardo Hausmann: Absolutely!

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About the expert: Ricardo Hausmann is Professor of the Practice of Economic Development and Director of the Center for International Development at Harvard University. Previously, he served as the first Chief Economist of the Inter-American Development Bank (1994 to 2000). He has served as Minister of Planning of Venezuela (1992 to 1993) and as a member of the Board of the Central Bank of Venezuela. He also served as Chair of the IMF-World Bank Development Committee. His research interests include issues of growth, macroeconomic stability, international finance, and the social dimensions of development.