Fuel made directly from biological sources. Primary examples include methane, biodiesel, ethanol, methanol, and vegetable oil. Oil is not considered a biological source due to the time frame involved. Aside from energy put into production, biofuels are generally considered to be "carbon neutral" because some or all of the carbon in the fuel comes from the atmosphere, and is released back when burned.
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.
This is a Material Safety Data Sheet for Butanol, an alternative fuel that can be made from any biological materials by a bacteria first utilized to make the ingredients for TNT.
Butanol, or butyl alcohol is a more complex alcohol that can be utilized as a direct gasoline replacement without modification. It can be burned alone, or mixed with gasoline without ill effects. It has 10% less energy than gasoline, but a 25% higher octane rating, meaning that with higher compression it should be possible to get more energy out of it, making it potentially ideal as a racing fuel. Most butanol is currently made from fossil fuels but it can also be made by a bacterium, Clostridium acetobutylicum - first used to make TNT in 1916.
A biofuel is a fuel based on a biological source. This typically means that is derived from plant stocks, but it is also possible to make fuels from animal fat. Biofuels have some major advantages over fossil fuels: