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Rise of Ethanol in Brazil?

Earlier this week in Brazil, the price of ethanol rose above the price of sugar for the first time in nearly two years. What does this mean? Sugar mills, which dot Brazil’s landscape, will now opt to produce ethanol rather than sugar. This is a key development in a country that has been a leader in sugarcane ethanol for the past 40 years.

Since the 1970s, Brazil has led the way in producing alternative liquids as a part of the country’s energy matrix. Indeed, in 1975, Brazil initiated a gasoline substitution program called Pró-Álcool (The National Alcohol Program), which was developed in response to the world oil crisis at the time. Brazil could pivot its extensive sugar supply to produce ethanol, which could be used as an automotive fuel instead of relying on fossil fuels—which fluctuated in price—in large part due to the vagaries of the Organization of the Petroleum Exporting Countries (OPEC).

This approach resulted in a win-win: Brazil became the world’s second-largest producer of ethanol fuel and, until 2010, was the world’s largest exporter. The Brazilian government subsidized production of ethanol, mandated that fueling stations offer ethanol in addition to gasoline, and provided incentives to build cars that ran on ethanol alone. Later, Brazilian automakers began producing “flex-fuel” automobiles that gave drivers the option to fill up their tank with either pure ethanol, or an ethanol/gasoline blend, depending on what was cheaper on that particular day.

Nevertheless, a program that relies on government subsidies to survive will inevitably hit roadblocks in its sustainability. When oil prices declined in the 1980s, the Brazilian government ceased subsidizing ethanol because doing so was too expensive. However, the sugarcane ethanol industry waged a comeback. Production increased from about 2,800 liters of ethanol per hectare in 1975 to nearly 7,000 in 2011.

Nonetheless, the global financial crisis in 2008 wreaked havoc on the biofuels industry in Brazil. The crisis led to a drying up of new investments, forcing the industry to produce from older, less productive sites. Furthermore, yields plummeted to the point where Brazil actually had to import 1.5 billion liters of corn-based ethanol from the U.S. Coupled with price freezes on gasoline and diesel, the competitiveness of ethanol weakened from being 55 percent of the fuel matrix in 2008 to 35 percent in 2012.

Petrobras’ 6.6 percent increase in gasoline prices on January 30 along with President Dilma Rousseff’s expected abolishment of the state tax on ethanol are both good news for the ethanol industry. Combined with ethanol’s price advantage vis-à-vis sugarcane, does this mean a return to prominence for álcool? A cautious optimism would seem to be appropriate given ethanol’s history in Brazil, but it is certain that the industry will continue to be prominent in the country’s energy matrix.

*Christian Gómez, Jr. is a contributing blogger to AQ Online. He is director of energy at the Council of the Americas. Follow him on Twitter at @cgomezenergy.

Tags: Brazil, Ethanol

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