Since the renewable fuels standard (RFS) was enacted in 2005, many Big Oil companies have partnered with, invested in and acquired biofuels companies. The trend has increased recently as oil companies have realized that the American public wants to make sure that biofuels have a permanent role in the transportation fuels market. For many in the biofuels industry, this encroachment by oil companies is an unwelcome and troubling sign of how they are unwilling to let the biofuels industry succeed as a true independent alternative to petroleum. To others, it is viewed as a positive sign that biofuels are finally being treated seriously. But before considering whether the biofuels industry should be pleased or horrified, there needs to be an understanding of how biofuels actually measures up against petroleum.

The United States is the world’s leader in petroleum consumption. In 2007, the U.S. consumed more than 390 million gallons of gasoline per day, amounting to approximately 142 billion gallons of gasoline consumed in one year

By contrast, the U.S. consumed just 17.7 million gallons of ethanol. In total, we consumed approximately 6.5 billion gallons, or 4.5 percent of the country’s annual gasoline consumption. In 2008, gasoline consumption decreased slightly due to the economy, and ethanol production increased to approximately 9 billion gallons, approximately 6.3 percent of total U.S. gasoline consumption.

Before the 2005 RFS, ethanol constituted an even smaller percentage of the U.S. fuels market. Blending was discretionary. If it was required at all it was only as an oxygenate to be used in place of methyl tertiary ester butyl ester (MTBE). After the 2005 RFS however, oil companies were required to blend a certain amount of ethanol. They did it rather reluctantly, generally viewing ethanol as competition. With the enactment of the RFS2, the amount of biofuels required to be blended increases yearly from 9 billion gallons in 2008 to 36 billion gallons by 2022.

A major concern associated with the RFS and the current climate of renewable fuel production is that the mandate’s goals will be undone by the huge gap between mandated blending levels and actual renewable fuel production. For example, at the beginning of 2009, the installed ethanol capacity was 12.5 billion gallons. Many plants, however, are now either sitting idle, producing well under their nameplate, or in bankruptcy. According to the Renewable Fuels Association, almost 2 billion gallons of capacity was sitting on the sidelines. This underproduction will seriously hinder the ability of renewable fuels producers to meet the RFS in the future. There are also significant doubts about whether there will sufficient cellulosic ethanol production to meet the RFS 2009 and beyond requirements. And low carbon fuel standards such as those California has adopted and the EPA is reviewing will also likely significantly hurt the industry’s ability to produce.

So, while ethanol production is becoming an increasingly significant (almost 10 percent) portion of U.S. transportation fuel supply and efforts are underway to increase the maximum blending percentage to 15 percent, U.S. ethanol production is still a relatively small component of the U.S. liquid fuel transportation system.

The good news for biofuels is that there is significant political, societal and even economic pressure to increase our use of biofuels. The RFS2 is a significant driver for biofuels usage and billions of dollars of federal funding are being directed towards advanced biofuels project development. Carbon legislation may also make using carbon intensive fuels cost prohibitive compared to lower carbon biofuels. Public pressure is also increasing to move away from petroleum to a renewable alternative.

Economic pressures may be the ultimate trump card, as most experts agree that oil will eventually run out, be it in 50, 75 or 100 years. As oil becomes scarce, it will become more expensive, making biofuels price competitive, an advantage that biofuels can exploit as technological development drives down the production costs for biofuels.

However, for right now and for the near future, oil companies vastly out-produce biofuels, control the infrastructure and have far more resources, making them the 800-pound gorilla. So when oil companies start to actively participate in biofuels, the biofuels industry needs to look and learn.

British Petroleum plc has been very active in the renewable fuels industry in recent years. The company has invested $112.5 million in a partnership with Verenium Corp. and together they plan to develop the world’s largest cellulosic biofuels production facility in Florida. BP has also invested $500 million to establish the Energy Biosciences Institute, a research endeavor between BP, the University of California at Berkeley, the University of Illinois at Urbana-Champaign, and the Lawrence Berkeley National Laboratory.

Chevron has said it expects to invest more than $2.5 billion in alternative and renewable energy technologies between 2008 and the end of 2009. Chevron also announced in January 2008 that it had entered into an agreement with Solazyme to develop and test feedstocks for biodiesel production.

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