High Oil Prices Help Oil Production, But Not Biofuels

High oil prices were supposed to make biofuels and other oil alternatives more competitive. If only oil would stay above $80 a barrel (or $70 or $60), biofuels companies often say, then they’d have a market. Their technology for turning weeds into alcohol or pond scum into crude oil could really take off.

But now that we’ve had years of high oil prices, what’s really taking off is oil production. High prices have stimulated investment in advanced technologies for extracting difficult-to-reach sources of oil, and that’s unlocked vast new resources (see “Shale Oil Will Boost U.S. Production, But It Won’t Bring Energy Independence”). As a result, oil supplies are growing fast, according the International Energy Agency’s five-year forecast, a key report—released today—that helps shape investment decisions in the oil industry. Meanwhile, biofuels production is growing slower than expected, and for years it will continue to provide only a negligible fraction of fuel worldwide.

According to the report, worldwide oil production will reach 103 million barrels per day by 2018, growing by 8.3 million barrels per day between now and then. Total biofuels production will amount to 2.36 million barrels per day, up only slightly from the 1.86 million barrels per day in 2012.

One of the keys to the anticipated growth in oil is that the hydraulic fracturing and horizontal drilling technologies used to access shale oil can also be used to increase production from conventional wells, a relatively low-risk proposition.

In contrast, when it comes to advanced biofuels made from grass and wood chips, the industry faces the challenge of convincing investors to finance unproven technologies. That’s turned out to be difficult: many biofuels projects have been cancelled because the technical challenges proved harder than expected or because there wasn’t enough financing. The report concludes that “the political framework for advanced biofuels in many countries seems to be insufficient to fully address the investment risks associated with first-of-their-kind commercial-scale production plants.”