Ethanol and Brazil: The New Global Energy Brand?
Ethanol And Brazil: The New Global Energy Brand?
When it comes to energy, Brazil is on its way to becoming a “global brand.” Although the United States recently outpaced Brazil in ethanol production, Brazil is by far the leader in sugar-based ethanol. Its exports are growing, and it could become a major energy supplier to the world. But what Brazil is particularly known for is its grand conversion-moving almost 40 percent of its automotive fuel from gasoline to ethanol.
Ethanol in Brazil is used in two ways: either blended, in a mix of 75 percent gasoline and 25 percent ethanol, or as pure ethanol pumped directly into a car’s fuel tank. On any given day, motorists across Brazil can stand in front of a pump and decide, based on price, whether they want to put ethanol or gasoline into their “flex fuel” car engine or whether they want to blend them.
Brazil has now achieved energy self-sufficiency. Ethanol is a part of the explanation, but it would be an error to think that it is the only one. There has been great success from drilling in Brazil’s offshore waters, and domestic oil output has increased by 40 percent since 2000-from 1.2 million barrels per day (mbd) to 1.7 mbd in 2006. This 500,000 barrel per day increase compares to 240,000 barrels per day of ethanol consumption.
How did ethanol achieve its prominent role in Brazil? It has been made possible by a series of factors: strong government support, especially after the 1973 oil shock; continual adoption of new technologies over more than a quarter century; and the cheapest production costs in the world.
The Brazilian government made a strong commitment to ethanol in the mid-1970s, in response to the first oil crisis. At that time, Brazil was importing more than 80 percent of its oil. The first oil shock had a highly detrimental effect on Brazil’s economy, influencing a significant drop in the country’s GDP growth, from almost 14 percent in 1973 to five percent in 1975. A program to stimulate domestic production of ethanol as a transport fuel was embraced as the way to reduce the country’s exposure to the world oil market.
This Brazilian effort began in 1975. It was championed as the Pro-Alcohol Program, since ethanol is known as alcohol in Brazil. The program consisted of both public and heavily subsidized private investment in ethanol production, together with governmental mandates to blend the fuel with gasoline and incentives to stimulate the sales of cars that ran on pure ethanol.
With government incentives, pure ethanol vehicles comprised 95 percent per cent of domestic auto production in 1984. By 1988, Brazil was consuming 1.7 gallons of ethanol for each gallon of gasoline.
In the mid-1980s, however, ethanol got caught in a vise. Oil prices fell sharply and, at the same time, international sugar prices rose. Ethanol was no longer as attractive as it had been for Brazilian producers and motorists.
By the end of the 1980s, a sharp fall in ethanol production, together with a prevalence of pure ethanol vehicles, led to a shortage, enraging motorists and damaging the credibility of Brazil’s ethanol industry. As consequence, ethanol cars fell from 92 percent of total vehicle sales in 1985 to less than 20 percent in 1990. At the end of the 1990s, ethanol production was back to same level that it had been in the mid-1980s. Today, almost no pure alcohol vehicles are being produced, in large part because of an innovation that has recently helped ethanol enjoy a new boom in Brazil. This is the “flex-fuel vehicle.”
The flexible fuel vehicle is a simple technological innovation that has dramatically enhanced the attractiveness of ethanol in Brazil by giving consumers choice of the fuel they can use in their cars.
After 2000, stimulated by rising oil prices and a new initiative by the government to encourage consumption of renewable fuels, the Brazilian automotive industry began to produce vehicles that could run on either ethanol or gasoline in any proportion. The previous experience with the Pro-Alcohol Program had left behind a strongly developed ethanol infrastructure, with more than 90 percent of the country’s filling stations capable of offering the fuel in its pure form.
Thanks to competitive pricing for the vehicles and for ethanol, flex-fuel vehicles have been widely adopted in Brazil. They represented 80 percent of all light cars sales in 2006, a number even more impressive considering that they only started to be marketed by the end of 2003.
Today, many Brazilian motorists make their fuel choice based on the relative price of gasoline and ethanol. And ethanol is able to compete without any subsidies against gasoline. This partly is because the government taxes gasoline at a higher rate-the gasoline tax burden is 45 percent of the final price, while the tax on ethanol is only 28 percent.
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