There is a great deal of argument over biofuels, and indeed we don’t want to overuse them. But I don’t think anyone argues that we can’t get some of our power from biomass, or that we won’t need a sustainable source of hydrocarbons for chemicals and liquid or gaseous fuels.

I’m going to ignore the usual suspects for a moment to discuss the Fischer-Tropsch process, which uses catalysts to convert biomass to gasoline, diesel, or kerosene (pretty much in whatever ratios you wish). Unlike biodiesel and ethanol, these products are 100% compatible with existing engines in all temperatures, without needing dilution by fossil fuels and without needed engine modifications, even minor ones. The net energy balance is better than for cellulosic ethanol, too.

The problem has long been price. The usual assumption is that gasoline and diesel from Fischer-Tropsch would cost about five times as much as gasoline and diesel from conventional sources. However, if a new study by the German Department of Energy is to be believed, it can be retailed for about 2.25 times the price of conventional gasoline and diesel in the U.S. (German language PDF — here’s an English summary).

According to the study, production costs would be about $3.98 per gallon. Margins between refinery and retailer vary, but when oil prices are up, retailers get squeezed, and end up charging about 42% over the price of refined product (including taxes). So the U.S. retail price of Fischer-Tropsch gasoline would be around $5.65 per gallon, which is still a bit less than Europeans pay with their higher gas taxes. This is within the range of other bioliquids.

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The study seems to assume technical breakthroughs coming on schedule. On the other hand, it also assumes import of raw biomass for processing. So there’s a good chance it’s a reasonably conservative, or at least not wildly optimistic, estimate.