"Russia, Middle East Turmoil Deepens" India Doubles Down on Biofuels as Energy Supply Chain Risks Mount

India ramps up biofuel drive, aggressively leveraging sugarcane and related feedstocks
Era of discounted Russian crude fades, intensifying search for alternative fuels
Major economies also expand biofuel adoption amid Middle East energy supply risks

India's sugar producers are accelerating ethanol production for biofuel applications as the government steps up efforts to secure domestically sourced alternative energy. Sugarcane and molasses, once primarily destined for sugar exports, are increasingly emerging as key pillars of the country's energy supply chain. As successive conflicts prolong instability in global energy markets, the shift toward biofuels is becoming increasingly evident not only in India but also across major economies including the United States and Brazil.

India's Expanding Biofuel Strategy

Nikkei Asia reported on July 6 (local time) that India's push to expand ethanol production is fundamentally reshaping the profit structure of the world's largest sugar industry. According to the report, Indian sugar producers are reducing their focus on securing sugar volumes for export while channeling investment into biofuel distillation facilities utilizing sugarcane juice and molasses. The transition reflects the government's expanding ethanol blending policy, which has shifted the industry's center of gravity toward domestically focused ethanol production.

India currently operates the Ethanol Blended Petrol (EBP) program to expand the use of domestically produced biofuels. Under the program, ethanol derived from sugarcane juice, molasses, damaged grains, corn, and other feedstocks is blended into gasoline at designated ratios. The original objective was to raise the ethanol blending ratio to 20% by 2030, but the target has recently been brought forward to the 2025-2026 supply year. In response, local sugar producers and grain-based distillers are expanding fuel ethanol production capacity in line with government policy.

However, maintaining traditional sugar exports while simultaneously increasing ethanol production has become increasingly difficult due to constrained sugarcane supplies. Reuters reported last month that India's monsoon rainfall between June and September could fall to its lowest level in 11 years because of El Niño. Rainfall in India during the previous month was more than 40% below seasonal averages. Farmers have begun delaying sugarcane cultivation or switching to alternative crops, making a decline in sugarcane output virtually inevitable. In response, the Indian government proactively upgraded its export policy for raw sugar, white sugar, and refined sugar from "restricted" to "prohibited" in May, effectively suspending general sugar exports through Sept. 30. Limited exceptions remain, including existing tariff-rate quota allocations for the European Union (EU) and the United States, as well as government-approved export volumes.

Diminishing Price Advantage of Russian Oil

India's increasingly aggressive biofuel policy has been driven largely by mounting energy supply chain risks. Following the outbreak of the Russia-Ukraine war in 2022, India emerged as one of the largest beneficiaries of discounted Russian crude oil. As Western sanctions cut off Russia's access to European markets, Moscow redirected crude exports toward Asia, allowing Indian refiners to purchase Russian oil at substantial discounts to Brent crude. As a result, Russia overtook Saudi Arabia and Iraq to become India's largest crude supplier, enabling Indian refiners to reduce refining costs while strengthening the competitiveness of their petroleum exports.

That advantage, however, proved short-lived. As the United States raised the possibility of imposing tariffs and sanctions on countries purchasing Russian crude, Indian refiners significantly scaled back new purchases. Although imports of Russian crude recovered this year after an extended slowdown, pricing dynamics have changed. India's total crude imports reached a record 4.93 million barrels per day in June, the highest ever for the month, with Russian crude accounting for more than half of the total.

The challenge is that Russian crude no longer offers the steep discounts it once did. Russian Urals crude delivered to India in March reportedly traded at a premium of USD 4 to USD 5 per barrel relative to Brent crude, rather than at a discount. Commenting on the situation, one market expert said, "Russian crude remains an important option for India, but it can no longer function as the source of ultra-cheap energy it once was," adding, "With the previous model of reducing costs through discounted Russian oil no longer viable, strengthening domestically based alternative fuel policies is a rational course of action."

United States, Brazil Also Turn to Biofuels

These energy supply chain pressures intensified further following the outbreak of war between the United States, Israel, and Iran in late February this year. The conflict disrupted energy transportation through the Strait of Hormuz, a strategic maritime corridor connecting the Persian Gulf and the Gulf of Oman through which crude oil and liquefied natural gas (LNG) exports from major producers including Saudi Arabia, Iraq, Kuwait, Qatar, and the United Arab Emirates (UAE) pass. Heightened tensions in the region increase risks such as tanker delays, higher maritime insurance premiums, and additional rerouting costs, rapidly driving up the cost of procuring Middle Eastern energy. For India, which has long relied on Middle Eastern producers as key energy suppliers, the situation has heightened the urgency of securing alternatives such as biofuels.

The growing risks facing global energy supply chains have also prompted numerous countries beyond India to strengthen their biofuel policies. For example, the U.S. Environmental Protection Agency (EPA) has set this year's total Renewable Fuel Standard (RFS) obligation at 26.81 billion Renewable Identification Numbers (RINs), representing a 20.1% increase from 22.33 billion RINs last year. RINs are credits that verify renewable fuel production and blending activity, with one RIN corresponding to one gallon of ethanol-equivalent renewable fuel. Refiners meet EPA renewable fuel obligations either by blending biofuels to generate RINs or by purchasing RINs in the marketplace.

Brazil is also among the countries making aggressive use of biofuels. Backed by its sugarcane-based ethanol industry and widespread adoption of flex-fuel vehicles, Brazil has developed a robust biofuel ecosystem. The Brazilian National Energy Policy Council (CNPE) currently mandates a 30% anhydrous ethanol blend in gasoline and a 15% biodiesel blend in diesel fuel. This energy structure has enabled Brazil to absorb much of the impact of international gasoline price volatility stemming from the Iran conflict. According to the Associated Press, while gasoline prices in the United States surged 30% in March, gasoline prices in Brazil rose by only 5%.