How the Hormuz crisis is driving a biofuels boom

Demand for biofuels has been growing in many parts of the world. Governments, particularly those in countries with big farming sectors, have viewed crop-based fuels as a way to support domestic agriculture, cut transport fossil fuel emissions and help address climate change.

The energy crunch caused by the closure of the Strait of Hormuz has created a further incentive to boost production: energy security. Biofuels cannot fully replace petroleum, but they can be blended into petrol and diesel, allowing countries to stretch existing fuel supplies.

Since the Iran war broke out, major biofuel producing countries Indonesia, Malaysia, Thailand, Vietnam and Brazil have moved to allow more biofuels to be mixed into transport fuels to cut down on imports and ensure security of supply.

Yet, many environmentalists contest the idea that biofuels are a sustainable alternative source of energy. And as more farmland is used to produce them, there is less available to make food, increasing the risk of global food shortages and hunger in the poorest nations.

What are biofuels?

Biofuels are made from biomass – typically crops such as corn, sugarcane, soya beans and palm oil – rather than fossil hydrocarbons such as oil.

They are mainly used for transport, where they are blended into petrol and diesel as a cleaner-burning alternative, but they can also be used for power generation, heating and aviation. Ethanol, used in petrol, is made by fermenting sugars or starches from corn and sugarcane using yeast – a process similar to brewing beer or wine – before being distilled to fuel-grade purity.

Biodiesel is produced by reacting vegetable oil or animal fat with alcohol, splitting the molecules into two layers: a thin, fuel-like liquid that can be used in diesel engines and a denser by-product called glycerin that is used in products such as shampoo and toothpaste.

There is also renewable diesel, or hydrotreated vegetable oil, in which feedstocks are processed with hydrogen under high pressure to produce a higher-quality “drop-in” fuel that performs better in cold weather.

The priciest biofuel is sustainable aviation fuel, or SAF, which uses advanced refining processes to convert waste oils into jet fuel that can be blended for use in aircraft.

There is also so-called advanced or second-generation biodiesel, made from non-food sources like crop waste, wood chips and even algae, which avoids competing with food crops.

Why is demand for biofuels on the rise?

Demand has been rising for decades, but accelerated sharply from the early 2000s as governments introduced mandates to curb greenhouse gas emissions and reduce reliance on imported oil.

Biofuels now account for about 6 per cent to 8 per cent of global farmland use, compared with about 1 per cent 20 years ago.

In the US, production has been growing since the 1980s, but surged after the Renewable Fuel Standard was expanded in 2007, helping to make the country the world’s largest ethanol producer, accounting for roughly half of global supply.

Similar policies in Brazil, the European Union and later Asia made biofuels a core part of energy and climate strategies.

Governments see biofuels as a quick win. They can be blended into existing fuels and used in most engines, while leveraging existing infrastructure like refineries and fuel stations.

This avoids the need for the costly new systems that are required for other non-fossil fuel energy sources such as hydrogen.

For countries with large agricultural sectors – particularly emerging economies – biofuels offer a way to repurpose crops, support farmer incomes and cut fuel imports. Indonesia’s palm-based biodiesel programme, for example, has become key to reducing a hefty diesel import bill.

Demand now comes from both developed and emerging economies, but for different reasons.

In the US and Europe, it is driven by climate policy and emissions targets.

In countries such as Indonesia, India and Brazil, the focus is on energy security and affordability, particularly where electrification of transportation has been slower and vehicles still rely heavily on liquid fuel.

How has the Hormuz crisis affected demand for biofuels?

The disruption to global energy flows has accelerated the shift towards biofuels, pushing governments and producers to fast-track blending, production and trade.

The world’s second-largest ethanol producer, Brazil, has announced plans to raise the limit for the proportion of ethanol biofuel that can be blended into petrol to 32 per cent of the total from 30 per cent currently, a way to limit a rise in domestic petrol prices due to the war and rein in inflation in a general election year.

Brazil’s government said the measure will potentially allow the South American country to stop importing petrol.

Indonesia, the world’s largest palm oil producer, is hastening its roll-out of a diesel blend comprised of 50 per cent biofuels – one of the world’s most ambitious biofuel-blending mandates – in a nationwide push towards self-sufficiency in food and fuel.

Neighbouring Malaysia, which lies a distant second in terms of palm oil production, plans to gradually raise the share of palm-based fuel in diesel to 20 per cent from 10 per cent.

In the US, the war with Iran has been used as a talking point for proponents of biofuels to push for the government to allow nationwide, year-round sales of higher-ethanol petrol.

They say that because ethanol is currently cheaper than petrol, it makes sense to increase the amount of the corn-based fuel sold as a way to ease costs for consumers.

Can biofuels really solve the energy crisis?

Biofuels can help to offset costs of soaring petrol prices, as mixing them with petrol means you need less of the fossil fuel to produce a similar amount of energy.

Still, these products are no silver bullet. For one thing, critics say higher ethanol content is slightly less energy-dense than petrol, meaning you could get fewer kilometres per litre when using it in your car. And in some places, there is a limit to the amount of biofuels that can be blended.

In the US, the standard amount of ethanol sold in petrol is 10 per cent.

Federal air quality rules restrict sales of higher-ethanol E15 during the summer months because higher temperatures increase evaporation, contributing to smog.

The Environmental Protection Agency can waive those limits in emergencies, and the Trump administration has already issued a waiver for the summer of 2026 after doing so in 2025. Similar waivers were used for three years under former president Joe Biden.

Equipment is also a problem. Some cars, particularly older ones, cannot run on petrol made of higher blends of biofuels. And you need special cars that are not common in places like the US to run on really high levels.

Why are there concerns about the growth of biofuels?

A large share of biofuels come from food-based feedstocks such as corn, soya beans, sugar cane and palm oil, which means diverting these crops into fuel can tighten supplies, raise prices and stoke food inflation.

These tensions tend to intensify when events such as wars and extreme weather threaten harvests, as each biofuel policy push risks forcing a trade-off between feeding people and fuelling economies.

India, the world’s biggest vegetable oil importer, warned that global palm oil supplies are tightening as top producers Indonesia, Malaysia and Thailand all channel more output to domestic biofuels “at a time when import dependence remains high and price sensitivity is elevated” – a strain that could worsen if the El Nino weather phenomenon curbs farm yields.

In the US, it is unlikely that corn ethanol production will lead to an increase in food prices as corn crops are hitting records and farmers are looking for other sources of demand, including biofuels, to keep up with rising costs of production.

Land use change has also become a key source of concern, especially in countries such as Brazil that are confronting agriculture-driven deforestation.

The country has long faced criticism from overseas buyers and environmentalists over how biofuels cause more land to be converted for farming. Brazil’s response to those claims has focused on the nations’ capacity to grow multiple crops a year on existing farmland, with most corn used in ethanol coming from that system. 

The European Union, meanwhile, has classified palm-based biodiesel as a high-risk source of indirect land-use change, citing concerns that rising demand can drive deforestation and displace food production.

The bloc is phasing out the use of such fuels by 2030, even as overall biofuel use in transportation continues to grow in the region.

Biofuel production can also pollute the air and ground water. And it uses an enormous amount of water to grow crops for biofuel, which could worsen stress on ecosystems. BLOOMBERG