A couple of years ago, when the cost of oil started to soar, Joel Rosado didn't think twice. The owner of an air-taxi service in Mineiros, Brazil, with a fleet of 12 planes, he needed to do what he could to contain fuel costs--he spends 20 percent of his revenues each year on 300,000 or so liters of fuel. So he rang up aircraft-maker Embraer, put in an order for the latest-model single-propeller Ipanema plane and tanked up--with alcohol. Flying on ethanol (a form of alcohol) distilled from sugar cane slashed the fuel bill for his Ipanema by 40 percent, at no cost to performance. Now Rosado is buying another brand-new Ipanema and plans to convert his 11 other planes to alcohol, too. The only problem: Embraer, the world's first manufacturer of ethanol-fueled planes, now has so many customers that there's a two-year wait list to convert gasoline engines to alcohol. Embraer is now looking into converting the T25, a military-training turbojet, to alcohol. "At this rate," says Embraer executive Acir Padilha, "the gasoline motor is headed for extinction."

Its demise is not restricted to the air in Brazil. The country's sugar-cane fields now feed a network of 320 ethanol plants, with 50 more planned in the next five years. Most of Brazil's 20 million drivers still tank up with fuel that is cut with 25 percent ethanol, but a growing fleet of new-generation (flex-fuel) cars can run on straight ethanol, which goes for as little as half the cost of gas at every service station from downtown Rio to the remote Amazon outback. To keep up with demand, local sugar barons and giant multinationals will invest some $6 billion in new plantations and distilleries over the next five years. And Brazilian ethanol tankers are plying the seven seas, supplying fuel-hungry countries like South Korea and Japan as they begin to diversify away from oil. No wonder there's talk of Brazil's fast becoming "the Saudi Arabia of ethanol."

Unlike oil, however, no one country dominates the market for ethanol and other so-called biofuels. In the United States, the use of ethanol made from corn has surged, thanks to new clean-air man--dates and a fat federal tax credit. Production is almost as high as Brazil's, doubling since 2001 and already replacing 3 percent of all transport fuel. The energy bill passed by the U.S. Congress last week will double ethanol production again. In Europe, Germany has become the world's biggest producer of "biodiesel," a high-performing, high-octane fuel--the German variety is made from rapeseed--that is cutting into sales of regular diesel at the nation's pumps. In more than 30 countries from Thailand to India, Australia to Malawi, crops as diverse as oil palms, soybeans and coconuts are being grown for fuel. Venezuela, Indonesia and Fiji announced biofuel initiatives just last week. They hope to emulate Brazil, which is revolutionizing both the countryside and the auto industry.

Has the inevitable transition from petroleum to next-generation fuels begun, right under our very eyes? Certainly no one expects oil to disappear overnight--or even in the next one or two decades. Even after the recent surge, farm-grown biofuels like ethanol and biodiesel still account for only a small fraction of fossil-fuel use, as do other renewables such as wind and solar power. But thanks to skyrocketing oil prices, worries about climate change and growing anxiety over the future security of the world's supply of crude, the prospects for ethanol and other biofuels to make major inroads in oil use are bright. Even as much of the world has focused on hydrogen cars, which may still be decades away, biofuels have, in the words of a Canadian report, begun to pose "the first serious challenge to petroleum-based fuel in a century."

The boom has some powerful institutions behind it. As governments across the globe come to grips with global warming, biofuels are seen as a pragmatic step toward reducing carbon emissions. A growing number of countries now require biofuels to be mixed into the fuel supply, and oil companies like Shell and British Petroleum have invested heavily in response. Already, Shell has become the world's largest distributor of ethanol through its global service-station network. Companies as disparate as Du Pont and Volkswagen are jostling for a slice of the $20 billion-plus market. Farmers worldwide are enthusiastic about a big, new outlet for their produce. Environmentalists hail the new fuel as clean and sustainable. Whereas petroleum releases carbon that had previously been trapped deep underground, the carbon in biofuels emissions has simply been captured from the atmosphere by crops. Some carbon and energy goes into production--fertilizers, transport, distilling--but the net effect, biofuel advocates say, is an up to 90 percent reduction in greenhouse-gas emissions.

Serious questions remain as to whether biofuels can be successfully scaled up to take on oil. Would there, for instance, be enough land on which to grow energy crops without putting the squeeze on food production? And will biofuels be able to take hold without tax credits and subsidies, especially if oil prices head downward? Then there's the politics of global trade. Already, powerful rich-country farm lobbies are trying to prevent exports of biofuel from Brazil, Pakistan and other developing nations. "There's no way to say where this will go," says Paris-based biofuels consultant Christian Delahouliere. "There is too much complexity and politics involved to draw a scenario."

The politics may be complex, but the technology is straightforward. Oil, after all, is itself a kind of biofuel. When plants are put under tremendous pressure for millions of years, hydrogen and carbon atoms rearrange themselves into molecules that, when burned, release abundant energy. Oil is also extracted from most plants by pressing them--peanut oil ran German engineer Rudolf Diesel's first eponymous engine in 1897. Plants--sugar cane, sugar beets or grapes--can also be fermented to produce alcohol. Like fossil fuels, vegetable oil and ethanol are hydrocarbons that release their energy when burned.

Indeed, what makes biofuels so compelling is that conventional engines can run on them. That means biofuels can be mixed into the existing fuel supply (gasoline or diesel) and be distributed using conventional gas stations. What's more, the biofuels component of what comes out of the pump can be gradually increased as production revs up, says Wolfgang Steiger, biofuels guru at carmaker Volkswagen. Combustion engines can run on gas "stretched" with 10 percent ethanol or less with no modifications. Higher concentrations require "flex-fuel" engines, which automatically adjust fuel injection depending on the fuel mix (more than half of all new cars in Brazil have them). Biodiesel--a high-quality, clean-burning fuel remarkably similar to petroleum diesel--is made from the oil extracted from the seeds of plants like soybeans or rapeseed, along with methanol (a type of alcohol) and a catalyst. Conventional diesel engines easily tolerate 20 percent biodiesel "stretching," and many are already warranted at up to 100 percent. Because biofuels "don't require anyone to reinvent the car," says Volkswagen's Steiger, they offer an advantage over hydrogen fuel cells, a new and infinitely more complex technology.

This compatibility is why many countries have picked up on biofuels as an easy way to reduce their import bill for oil. Thailand is building over a dozen ethanol plants using sugar cane and rice husks for supply. China has constructed the world's largest fuel ethanol facility at Jilin. It uses corn, but Chinese biofuel distillers are also experimenting with cassava, sweet potato and sugar cane. Besides very closely studying Brazil's production methods, Beijing is reported to be eying the idea of importing Brazilian ethanol as well. Japan has already gone that route, signing its first 15 million-liter deal with Brazil in May as a prelude to replacing up to 3 percent of Japan's gasoline, which would generate a demand for 1.8 billion liters of alcohol a year. Another boost to the burgeoning biofuels trade has come from the European Union, whose goal of using 6 percent biofuels by 2010 would require a fivefold increase in the production of biofuel crops--a gap other countries hope to help fill. Malaysia, for one, is expanding oil-palm plantations and setting up biodiesel plants expressly to serve the German market.

A global biofuel economy, with a division of labor favoring the most efficient producers, is key to developing biofuels as a viable alternative to oil. For many developing countries, year-round growing seasons and cheap farm labor are a valuable competitive advantage over cold, high-cost northern countries. Super-efficient Brazil now sells ethanol at the equivalent of $25 dollars a barrel, less than half the cost of crude. What's more, because parts of the sugar-cane plant are used both to fertilize the fields and to fire up the distilleries, Brazil uses much less fossil fuel to produce alcohol than Europe and America. In those places, by contrast, ethanol and biodiesel cost $50 and up because of shorter growing seasons, lower crop yields, and higher wages.

For either the United States or Europe to replace just 10 percent of transport fuel using today's crops and technology would require around 40 percent of cropland. Southern countries growing sugar cane, on the other hand, can get up to five times as much biofuel from each acre of land. "Without too much effort, producing ethanol from sugar cane in developing countries like Brazil and India could replace 10 percent of global gasoline fuel," says Lew Fulton, biofuels expert at the International Energy Agency. Malaysia, Indonesia and Australia are well positioned to join Brazil as global suppliers of sugar-cane ethanol.

Yet this emerging global market in biofuels is running into some serious political trouble. Developed-country farm lobbies are lending biofuels a powerful momentum, but also demanding protectionist barriers. "Everyone pretends [their enthusiasm] is for the environment, but it's all about agricultural subsidies," biofuels expert Delahouliere warns. To encourage biofuels, the EU pays farmers 45 euros for each hectare of "energy crops" they grow. That gives European farmers a big incentive to keep cheap foreign ethanol from entering their market. When Pakistan got special access to EU markets in 2002 and began shipping ethanol, says Delahouliere, local farm lobbies persuaded Brussels to change course and re-establish tariffs. The United States also has a 50-cent-a-gallon import duty on Brazilian ethanol. Even within the union, some European countries have raised subtle protective walls. Almost every country has its own biofuel standard with slightly different specifications.

The next generation of biofuels may be easier for northern countries to produce economically. Instead of getting fuel from sugar or oil--a tiny part of the total plant--upstart companies are building new factories that convert a plant's entire "biomass" into fuel. Present fermentation technology leaves the cellulose--a stiff material that gives plants their structure--as waste. (In the case of biodiesel, oil is pressed from the seeds; the rest of the plant is discarded.) Last fall, Canadian firm Iogen inaugurated the world's first commercial plant that takes leftover straw from surrounding farms and turns it into ethanol. The trick is to use genetically engineered enzymes--only now becoming cheaply available--that can convert the cellulose in straw to glucose, which is then fermented to produce ethanol. Shell Oil has invested $46 million for Iogen to complete a bigger facility that will produce 200,000 tons of ethanol a year--at an estimated cost of $1.30 per gallon--once it goes online in 2008.

In Germany, Volkswagen is financing Choren Industries, which is developing a process to synthesize a premium-quality diesel fuel from the cellulose in trees and straw. Cars at Volkswagen's Wolfsburg headquarters already use the fuel from Choren's pilot facility, and a commercial-size plant will go online in 2007. "This will drastically cut the amount of land needed to produce biofuels," says VW's Steiger.

To produce fast-growing crops--all that counts is total plant mass, not fruit size or seed count--Volkswagen is financing research on fast-growing willows and poplars, 50-headed sunflowers, and strains of corn three times as high as normal. "Growing plants for mass will change our landscape," Steiger says. According to a study released in April by the U.S. Department of Energy's Oak Ridge National Laboratory, the United States alone could use these new technologies to replace 30 percent of its current gasoline consumption by 2030--without cutting into food production or greatly changing land use.

The surprising news is that biofuels could help make hydrogen unnecessary. Already, the much-touted "hydrogen economy" looks farther away than ever--it may be 30 years before hydrogen plays any significant role, says VW's Steiger. In the meantime, Brazil dropped its alcohol subsidies in the late 1990s and now makes bio-fuel so competitive it could trump gasoline at $25 a barrel. With the rest of the world following Brazil, hydrogen is going to have to run fast to catch up. "At the very least biofuels are a bridge toward the hydrogen economy," IEA's Lew Fulton says. "But if you add increased use of biofuels, other fuels such as gas-to-liquid and coal-to-liquid, and finally add improvements in fuel efficiency, we may not ever need the fuel cell at all." That would make biofuels a convincing alternative indeed.

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