The US DOE (Department of Energy) released this report (PDF) on how it should be economically feasible to produce biodiesel from algae by the time US diesel fuel prices reached $3 per gallon.
Below are some choice excerpts from the report.
From 1978 to 1996, the U.S. Department of Energy’s Office of Fuels Development funded a program to develop renewable transportation fuels from algae. The main focus of the program, know as the Aquatic Species Program (or ASP) was the production of biodiesel from high lipid-content algae grown in ponds, utilizing waste CO2 from coal fired power plants. Over the almost two decades of this program, tremendous advances were made in the science of manipulating the metabolism of algae and the engineering of microalgae algae production systems.
Prior to this program, little work had been done to improve oil production in algal organisms. Much of the program’s research focused attention on the elusive “lipid trigger.” [...] Our work with nitrogen-deficiency in algae and silicon deficiency in diatoms did not turn up any overwhelming evidence in support of this trigger theory. [...] While the rate of production of all cell components is lower under nutrient starvation, oil production seems to remain higher, leading to an accumulation of oil in the cells. The increased oil content of the algae does not to lead to increased overall productivity of oil. In fact, overall rates of oil production are lower during periods of nutrient deficiency. Higher levels of oil in the cells are more than offset by lower rates of cell growth.
The program was the first to isolate the enzyme Acetyl CoA Carboxylase (ACCase) from a diatom. This enzyme was found to catalyze a key metabolic step in the synthesis of oils in algae. [...] In the closing days of the program, researchers initiated the first experiments in metabolic engineering as a means of increasing oil production. Researchers demonstrated an ability to make algae over-express the ACCase gene, a major milestone for the research, with the hope that increasing the level of ACCase activity in the cells would lead to higher oil production. These early experiments did not, however, demonstrate increased oil production in the cells.
Over the course of the program, efforts were made to establish the feasibility of large-scale algae production in open ponds. In studies conducted in California, Hawaii and New Mexico, the ASP proved the concept of long term, reliable production of algae. California and Hawaii served as early test bed sites. Based on results from six years of tests run in parallel in California and Hawaii, 1,000 m2 pond systems were built and tested in Roswell, New Mexico. [...] Careful control of pH and other physical conditions for introducing CO2 into the ponds allowed greater than 90% utilization of injected CO2. The Roswell test site successfully completed a full year of operation with reasonable control of the algal species grown. Single day productivities reported over the course of one year were as high as 50 grams of algae per square meter per day, a long-term target for the program.
The ASP regularly revisited the question of available resources for producing biodiesel from microalgae. This is not a trivial effort. Such resource assessments require a combined evaluation of appropriate climate, land and resource availability. These analyses indicate that significant potential land, water and CO2 resources exist to support this technology. Algal biodiesel could easily supply several “quads” of biodiesel—substantially more than existing oilseed crops could provide. Microalgae systems use far less water than traditional oilseed crops. Land is hardly a limitation. Two hundred thousand hectares (less than 0.1% of climatically suitable land areas in the U.S.) could produce one quad of fuel. Thus, though the technology faces many R&D hurdles before it can be practicable, it is clear that resource limitations are not an argument against the technology.
All of the above is from the report's introduction.