Success derails biofuels bandwagon

By Gerard Wynn and Muriel Boselli

LONDON/PARIS (Reuters) - A global, government policy-fuelled rush to produce biofuels is backfiring as it pushes up costs and makes the environmentally-friendly alternative fuel far less competitive.

Made from plants, bioethanol and biodiesel emit fewer greenhouse gases than fossil fuels and have been hailed as an answer to both climate change and energy security. U.S. and European backing look to have secured their long-term future.

But in the near term a looming biofuels glut plus falling rival crude oil prices, down a fifth on last summer's highs, mean producers can less easily pass on their spiraling costs.

The present dip will last until demand rebounds, perhaps as far off as the end of the decade.

"The two key ingredients for a dynamic biofuel sector are sky-high crude prices and cheap feedstocks," said Raffaello Garofalo, head of the European Biodiesel Board (EBB).

European Union leaders are expected this week to agree a binding target for the 27-nation bloc to get a tenth of its transport fuels from biofuels by 2020.

Falling oil prices are hurting sales of biofuel which was barely competitive before, pricking European and U.S. europhia built on subsidies and ambitious targets.

Profits are still to be had but a continuing scramble for raw materials like corn, soy and wheat will knock margins as producers re-negotiate more pricey supply contracts.

Still thriving, however, is biofuels pioneer Brazil, which has a booming domestic market where more than two-thirds of all new cars can run on either gasoline or ethanol.

This contrasts with the United States and Europe, which are propping up their less mature industries.

President Bush visits Brazil this week and the world's number two ethanol producer will lobby America, the number one, to end ethanol tariffs. Brazil has support from an unlikely quarter -- the International Energy Agency (IEA), energy adviser to 26 industrialized nations.

Fatih Birol, chief economist at the IEA told Reuters that the U.S. and Europe should scrap import duties on developing countries and in the longer term reconsider all subsidies.

SQUEEZE

Biofuels costs will likely fall and demand and prices rise in Europe and the U.S. as better infrastructure and economies of scale kick in over the next two to three years, analysts say.

U.S. Democrats last week proposed a $15 billion energy plan, including boosting the country's network of ethanol service stations, for example.