US demand is especially strong as the world's biggest energy user seeks a fuel cheaper and cleaner than oil and the water-polluting fuel additive methyl tertiary butyl ether (MTBE).

Ethanol is a biofuel that can be derived from biomass, such as sugar cane and grain. US ethanol is made from corn, but the other major source is Brazil's cane-based fuel.

"Rocketing oil prices have markedly boosted the relative competitiveness of fuel ethanol as against gasoline," Jolly said in an interview late on Thursday.

Oil hovered near US$70 a barrel on Friday, after a sharp two-day sell-off, as traders balanced healthy US gasoline supplies with persistent geopolitical risks.

Prices are almost US$5 below their record high touched two weeks ago, but still up more than 15 percent since the start of the year.

Commercial viability of ethanol production will depend on the trend of oil prices and feedstock and other costs, Jolly said.

The most effective means of encouraging ethanol production appears to be tax incentives, such as those applied in Brazil's extensive programme to support its ethanol industry, he said.

"Provision of capital grants is also important to kick start a fuel ethanol scheme, and is a means of providing support to domestic producers as against imported supplies -- an advantage not conferred by fuel tax exemptions," he added.

The fuel industry needs to promote consumer acceptance of blends of ethanol with petrol, Jolly said.

Furthermore, ethanol manufacturers need to ensure that by-products from production of the biofuel are used optimally -- for example, use of bagasse from cane feedstock to generate electricity for sale to the national power grid.

Bagasse is the residue remaining after extraction of juice from crushed sugar cane.