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The current fossil fuel reserves are not sufficient to meet the increasing demand and very soon will become exhausted. Pollution, global warming, and inflated oil prices have led the quest for renewable energy sources. Algal biofuels represent a potential source of renewable energy. Algae, as the third generation feedstock, are suitable for biodiesel and bioethanol production due to their quick growth, excellent biomass yield, and high lipid and carbohydrate contents. With their huge potential, algae are expected to surpass the first and second generation feedstocks. Only a few thousand algal species have been investigated as possible biofuel sources, and none of them was ideal. This review summarizes the current status of algal biofuels, important steps of algal biofuel production, and the major commercial production challenges.