Energy Diversity Dividends: Biofuels Lower Oil Prices

By Kit Batten, Jake Caldwell | March 24, 2008

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New commodities market analysis by Merrill Lynch & Co., Inc. proves the point the Center for American Progress has been making for a while now—that the boom in biofuels production is reducing the cost of oil around the world.

That conclusion may seem improbable given the dramatic run up in oil prices over the past five years. But the analysis by Merrill commodities market strategist Francisco Blanch (as reported today by the Wall Street Journal) says that:

“Oil and gasoline prices would be about 15 percent higher if biofuel producers weren't increasing their output. That would put oil at more than $115 a barrel, instead of the current price of around $102. U.S. gasoline prices would have surged to more than $3.70 a gallon, compared with an average of a little more than $3.25 today.”

This is precisely the point made by the Center for American Progress in its recently published Progressive Growth series of economic papers, particularly our Capturing the Energy Opportunity paper, as well as in our earlier report, Fueling the New Farm Economy. In both papers, we explained the link between diversifying our nation’s sources of energy and the corresponding fall in energy prices that would follow from diversification.

This is also why it is critically important that new sources of renewable energy, for biofuels and for alternative electricity such as wind, solar and ocean tides, need to be further developed with targeted federal funds alongside already rising private sector investment. Next-generation biofuels developed, for example, from jatropha, a tough shrub that grows in arid soil unsuited for agriculture, and inedible grasses such as switchgrass in the United States and miscanthus in Europe, hold the promise of new sources of clean fuels that will not require the divergence of food crops into energy production.

We of course need to ensure that the production of these new biofuels have lower life-cycle greenhouse gans emmissions than gasoline,  that they are produced sustainably, and that they do not raise food or feed prices. The Center has developed a Renewable Fuel Certification Program to deal with these key issues.

To provide the funding necessary to bring these and other clean, renewable energy sources to market swiftly to combat global warming, the Center for American Progress supports the introduction of a carbon cap-and-trade program. This program would provide tens of billions of dollars to build a green economy and offset the cost of rising energy prices for lower- and middle-income Americans.

Congress next month will renew debate on this cap-and-trade program alongside the 2008 Farm Bill, which also contains critical provisions to jumpstart the growth of next-generation biofuels. Members of Congress from both sides of the aisle should take note of the Merrill Lynch analysis and our policy analysis during those debates.

Kit Batten is Managing Director for Energy and Environmental Policy. Jake Caldwell is Director of Policy for Agriculture, Trade and Energy.