Ethanol and Brazil: The New Global Energy Brand?

But the main reason behind ethanol’s competitiveness is that Brazil’s sugar-based ethanol has the lowest production costs in the world-estimated at .10 per gallon.

Good weather and high land quality are certainly important factors in keeping down the costs of ethanol in Brazil, but they are not the only ones. Sugarcane has been grown in the country since the Portuguese colonization in the early 16th century, and industrial production of ethanol as a fuel goes back to the 1930s.

The 70-year old ethanol industry has invested heavily in new technologies and processes, and biotechnology is now employed to improve the quality and productivity of the sugarcane species. Integration of ethanol production with sugarcane processing has led to significant gains in efficiency and scale. For example, the cane fiber (called bagasse) is burned to generate electricity, which powers the sugar and ethanol production plant, with surplus power sold to the central grid.

The oil input in Brazilian’s ethanol production is minimal, restricted to the transporting of the sugarcane to the processing plant and moving ethanol from there to filling stations. The combination of these advantages provides Brazilian ethanol with a comfortable competitive position against oil.

The success of Brazil’s domestic industry poses an important question: Can Brazil go global with its ethanol? Brazil is already the largest ethanol exporter in the world, shipping 20 percent of it annual production abroad.

International demand for ethanol is expected to keep growing in the years to come. The main ethanol consumers outside Brazil are the United States and Europe, which are seeking to increase their domestic sources of ethanol supply. But, at least with current technology, their prospects are constrained.

High volume ethanol exports from Brazil to both the U.S. and Europe are also currently impeded by import duties, though some believe that growing demand for bio-fuels could lead to loosening of these barriers. But what happens to those barriers will be highly political, both in terms of domestic politics and trade negotiations.

If trade barriers fall, Brazil’s industry has much room to grow. Even excluding the rain forest and other protected areas, Brazil still has large areas that could be used to grow cane. Only two percent of the country’s total endowment of arable land-and ten percent of currently cultivated land-are now under sugarcane cultivation with half of that dedicated to ethanol production.

Advances in bio-technology have substantially enhanced plant types, improving their ability to thrive in a wider range of soils and climates. All this means that there is potential to expand Brazil’s ethanol production substantially and make it a major global energy supplier.

Furthermore, expansion of ethanol production in Brazil is unlikely to create the kind of food versus fuel conflicts that can be expected in other developing countries with agricultural potential.

How large a role Brazil will play in global markets will depend on many factors-the ability of the Brazilian industry to expand; the nature of fuel mandates and domestic industries of the large industrial countries; and international trade rules. Brazil’s ethanol industry will continue to play a large role in meeting Brazil’s domestic energy needs. It also has the potential to grow beyond the domestic market and to create large scale exports-and definitely make Brazil an energy brand around the world.

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