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The substitution of marginal oil with biofuels

Our report analyzes the substitution of marginal oil with biofuels. For that, we evaluate the effects that influence the substitution process in the short, mid and long term. We identify OPEC, resource nationalism, and geopolitical issues as important influence factors and arrive at the conclusion that in the short term biofuels will replace mainly OPEC oil but not the most expensive petroleum. In the medium and long term biofuels will replace the most expensive petroleum because OPEC production cuts are only possible on a temporary basis and in restricted quantities.

Our comparison of the costs of the different fossil fuels with their greenhouse gas emissions shows that there is no direct correlation between the level of greenhouse gas emissions and production costs. However, we see strong evidence every time that the marginal oil gets more carbon-intensive and that biofuels will increasingly displace these carbon-intensive fossil fuels. That is shown especially in the increase of unconventional fossil fuels and new frontier oil (Amazon, deep-sea, etc.).

The investments in these technologies are very price-sensitive, like the financial crisis 2008/2009 has showed. Further evidence brings the decline of the energy return on investment (EROI) of the oil production worldwide and the increase of the marginal oil costs from 25 to almost 100 dollars/barrel in the last 10 years. We expect that the increase of the carbon intensity of marginal oil will further enlarge the climate effects of global petroleum production. Marginal oil as an indirect effect of the biofuel use should therefore get the same significance value as indirect land-use change (ILUC) in the current climate protection debate.

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June 2013