In 1942 Harder and Von Witsch were the first to propose that microalgae be grown as a source of lipids for food or fuel. Following World War II, research began in the US, Germany, Japan, England, and Israel on culturing techniques and engineering systems for growing microalgae on larger scales, particularly species in the genus Chlorella. Meanwhile, H. G. Aach showed that Chlorella pyrenoidosa could be induced via nitrogen starvation to accumulate as much as 70% of its dry weight as lipids. Since the need for alternative transportation fuel had subsided after World War II, research at this time focused on culturing algae as a food source or, in some cases, for wastewater treatment.
Interest in the application of algae for biofuels was rekindled during the oil embargo and oil price surges of the 1970s, leading the US Department of Energy to initiate the Aquatic Species Program in 1978. The Aquatic Species Program spent $25 million over 18 years with the goal of developing liquid transportation fuel from algae that would be price competitive with petroleum-derived fuels. The research program focused on the cultivation of microalgae in open outdoor ponds, systems which are low in cost but vulnerable to environmental disturbances like temperature swings and biological invasions. 3,000 algal strains were collected from around the country and screened for desirable properties such as high productivity, lipid content, and thermal tolerance, and the most promising strains were included in the SERI microalgae collection at the Solar Energy Research Institute (SERI) in Golden, Colorado and used for further research. Among the program's most significant findings were that rapid growth and high lipid production were "mutually exclusive", since the former required high nutrients and the latter required low nutrients. The final report suggested that genetic engineering may be necessary to be able to overcome this and other natural limitations of algal strains, and that the ideal species might vary with place and season. Although it was successfully demonstrated that large-scale production of algae for fuel in outdoor ponds was feasible, the program failed to do so at a cost that would be competitive with petroleum, especially as oil prices sank in the 1990s. Even in the best case scenario, it was estimated that unextracted algal oil would cost $59–186 per barrel, while petroleum cost less than $20 per barrel in 1995. Therefore, under budget pressure in 1996, the Aquatic Species Program was abandoned.
Other contributions to algal biofuels research have come indirectly from projects focusing on different applications of algal cultures. For example, in the 1990s Japan's Research Institute of Innovative Technology for the Earth (RITE) implemented a research program with the goal of developing systems to fix  using microalgae. Although the goal was not energy production, several studies produced by RITE demonstrated that algae could be grown using flue gas from power plants as a  source, an important development for algal biofuel research. Other work focusing on harvesting hydrogen gas, methane, or ethanol from algae, as well as nutritional supplements and pharmaceutical compounds, has also helped inform research on biofuel production from algae.
Following the disbanding of the Aquatic Species Program in 1996, there was a relative lull in algal biofuel research. Still, various projects were funded in the US by the Department of Energy, Department of Defense, National Science Foundation, Department of Agriculture, National Laboratories, state funding, and private funding, as well as in other countries. More recently, rising oil prices in the 2000s spurred a revival of interest in algal biofuels and US federal funding has increased, numerous research projects are being funded in Australia, New Zealand, Europe, the Middle East, and other parts of the world.
In March 2023, researchers said that the commercialization of biofuels would require several billion dollars of funding, plus a long-term dedication to overcoming what appear to be fundamental biological limitations of wild organisms. Most researchers believe that large scale production of biofuels is either "a decade, and more likely two decades, away."