A global biofuels boom will lead to shortages of vegetable oils, used for cooking and now increasingly to fuel trucks and planes, intensifying the food versus fuel debate.
From the United States to Brazil and Indonesia, governments are embracing energy made from plants like soybeans or canola, or even animal fat, to move away from fossil fuels and reduce emissions. This has created opportunities for vegetable oils, especially palm oil, a ubiquitous but controversial ingredient found in products such as pizza dough, instant noodles, chocolate and shampoo.
Demand is so intense that producers are looking to used cooking oil and sludge, a waste product from palm oil processing, as raw materials for biofuels.
Such lofty ambitions may face challenges. War and extreme weather are limiting the supply of vegetable oil. A severe drought has devastated production in Argentina, the main exporter of soybean oil. In Europe, restrictions on the use of pesticides toxic to bees will slow the planting of pollinator-dependent canola, while Russia’s invasion of Ukraine will reduce sunflower oil exports.
With vegetable oil production growth expected to slow, biofuels could push the global market into a deficit in the second half of the year, according to Thomas Mielke, chief executive of Oil World, based in in Hamburg.
Biofuels make up a large portion of the vegetable oil market, but only a portion of energy demand, Mielke said. He is concerned that the combined biofuel targets are overstating what the global market for oils and fats can satisfy.
The United States, Europe, Brazil and Indonesia are responsible for most of the growth in biodiesel, renewable diesel and biojet consumption. The US uses a mixture of raw materials such as soybean oil, rapeseed oil, used cooking oil and animal fats. Europe is producing from waste, residues and rapeseed oil. Indonesia mainly uses palm oil to produce biodiesel, while Brazil relies on soybean oil.
This trend is expected to benefit palm oil, a product that has come under scrutiny in recent years amid reports of deforestation and forced labor. With oilseeds and rival vegetable oils increasingly being used in biofuels, some of the demand will shift to palm trees, according to James Fry, chairman of agricultural consultancy LMC International Ltd in Oxford.
But the palm oil market may not be able to keep up. Production in Indonesia and Malaysia, which together account for 85% of global supply, is leveling off as the slow replanting of old and unproductive trees, erratic weather and deforestation curbs limit expansion of land banks.
Supply threats, particularly from climate change, will push up agricultural prices and slow global efforts to turn food into fuel, said Dorab Mistry, an influential trader who has worked in the industry for four decades.
The International Energy Agency has warned that rising demand for biofuels and the feedstock crisis, if left unaddressed, will undermine the potential of biofuels to contribute to global decarbonisation efforts.
Biofuel mandates should be flexible and allow room for temporary adjustments in the event of supply shocks, according to Oil World’s Mielke. Given the importance of these policies to the entire oils and fats complex, any changes must be moderate as they can have a devastating impact, he said.
Last year, Russia’s invasion of Ukraine disrupted global trade in sunflower oil and increased demand for palm and soybean oil, sending prices to record highs. Even then, most countries did not ease their biofuel policies, which led to the destruction of demand in some vegetable oil consumers, mainly in developing countries.
“In periods of supply shortages, the necessary rationing of demand should not rest solely on the shoulders of food consumers,” Mielke said. “That’s a lesson we have to learn from last year.”
–With assistance from Sanjit Das, Kim Chipman and Tatiana Freitas.
Photo credit – iStock.com/Oksana Volina
