"Faced with today's technology, to scale up any more is going to put really big demands on ... not only energy input, but water, land and the nutrients you need, like carbon dioxide, nitrate and phosphate," said Jennie Hunter-Cevera, a microbial physiologist who headed the committee that wrote the report.

Hunter-Cevera stressed that this is not a definitive rejection of algal biofuels, but a recognition that they may not be ready to supply even 5 percent, or approximately 10.3 billion gallons (39 billion liters), of U.S. transportation fuel needs.

"Algal biofuels is still a teenager that needs to be developed and nurtured," she said by telephone.

The National Research Council is part of the National Academies, a group of private nonprofit institutions that advise government on science, technology and health policy.

Its sustainability assessment was requested by the Department of Energy, which has invested heavily in projects to develop the alternative fuel.

In 2009, the Department of Energy and the Department of Agriculture awarded San Diego-based Sapphire Energy Inc more than $100 million in grants and loan guarantees to help build a plant in New Mexico that will produce commercial quantities of algal biofuel. Two other companies received smaller amounts of federal assistance.

In February, as gasoline prices spiraled, Obama said algal biofuels had the potential to cut U.S. foreign oil dependence. He estimated that U.S. oil imports used for transportation could be cut substantially.

The National Research Council report shows that the government should continue research on algal biofuel as well as other technologies that reduce oil use, an Energy Department spokeswoman said.

"Today's report outlines the need for continued research and development to make algal biofuel sustainable and cost-competitive, but it also highlights the long-term potential of this technology and why it is worth pursuing," Jen Stutsman said in a statement.

The council's report noted that future innovations, and increased production efficiencies, could enhance the viability of algal biofuels.

GREENHOUSE GAS EMISSIONS

It said a main reason to use alternative fuels for transportation is to cut climate-warming greenhouse gas emissions created by burning fossil fuel. But estimates of greenhouse emissions from algal biofuels cover a wide range, with some suggesting that over their life cycle, the fuels release more climate-warming gas than petroleum, it said.

The product now made in small quantities by Sapphire uses algae, sunlight and carbon dioxide as feedstocks to make fuel that is not dependent on food crops or farmland. The company calls it "green crude."

Tim Zenk, a Sapphire vice president, said the company has worked for five years on the sustainability issues examined in the report. "The NRC has acknowledged something that the industry has known about in its infancy and began to address immediately," he said.

He said Sapphire recycles water and uses land that is not suitable for agriculture at its New Mexico site, where it hopes to make 100 barrels of algal biofuel a day by 2014.

The U.S. Navy used algal biofuel along with fuel made from cooking oil waste as part of its "Green Fleet" military exercises demonstration this summer, drawing fire from Republican lawmakers for its nearly $27 per gallon cost.

The council study also said it was unclear whether producing that much biofuel from algae would actually lead to reduced greenhouse gas emissions.

The report shows the strategy is too risky, said Friends of the Earth, an environmental group.

"Algae production poses a double-edged threat to our water resources, already strained by the drought," Michal Rosenoer, a biofuels campaigner with the group, said in a statement.

Industry group Algal Biomass Organization focused on the positives in its statement.

"We hope that policymakers and others involved in the future of the domestic fuel industry will recognize the NRC's conclusion that sustainability concerns are not a definitive barrier to future growth."

(Additional reporting by Timothy Gardner; Editing by Marilyn W. Thompson and Christopher Wilson)

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