Energy Lessons from Brazil

I was surprised by a headline I saw this morning: "Brazilians Call for Cut to 20% Ethanol Import Tax." At first I thought this referred to the US duty and tariff on ethanol imports, the repeal of which Brazil's President Lula has suggested to his US counterpart on more than one occasion. Instead, it seems that Brazil has had an ethanol import tariff of its own all along--who knew?--and today's call from Brazilian sugar trade association Unica stems from the recent weather-related shortfall in cane production that reduced ethanol inventories in Brazil and led to the government's temporary cut in the required ethanol content of gasoline from 25% to 20%. This situation illustrates a couple of energy lessons that don't quite square with the usual, overly-simplistic interpretation of Brazil's success at displacing oil with biofuel.

Brazil deserves recognition for its consistent approach to supporting the expansion of ethanol production from its normally-abundant sugar cane crop. The country has benefited from its government's deliberate efforts to promote the use of domestically-produced ethanol in a car fleet that increasingly consists of "flexible fuel vehicles" capable of running on widely-varying proportions of ethanol and gasoline. With an ethanol surplus and climate and geography well-suited to producing more--and much more efficiently than from corn and the other principal ethanol crops in northern latitudes--it's no surprise that Brazilians now consume more ethanol than petroleum gasoline. Yet as we see in today's news, Brazil's extraordinary reliance on biofuel creates a different kind of energy-security vulnerability, one related to crop yields rather than geopolitics. While Brazil's dual-fuel capability gives it ample flexibility to prevent a 5% drop in ethanol production for a few months from causing a crisis, just imagine the economic consequences of a comparable drop in oil production from the Middle East. Anyone advocating a complete switch to biofuels ought to ponder the potential unintended consequences carefully.

Another lesson hiding behind these ethanol statistics is that contrary to popular opinion, Brazil hasn't become energy independent because of its ethanol policies, though these have certainly helped. Rather, it is chiefly the surging output of Brazil's oil fields, which nearly doubled to 2.6 million barrels per day in the last 10 years and is not done growing, that has made Brazil self-sufficient in fuels. To put that in perspective, Brazil's oil platforms produce the energy-equivalent of 72 billion gallons of ethanol per year, or ten times its cane ethanol output. Although this was only possible because of the discovery of world-class resources off the country's coast, their development depended on consistent policies providing attractive access for the international firms that partnered with the state oil company, Petrobras, in exploring them. I wish more people in Washington, DC paid attention to the crucial contribution of offshore drilling to Brazil's appealing energy story.

As for the import tariff, I confess amusement at the inconsistency inherent in Brazilian politicians and business leaders criticizing a US tariff that exists mainly to prevent a US ethanol blending subsidy from leaking abroad, when they have their own tariff protection in place. I'd be happy to see both of these tariffs reduced or dropped entirely, but only if we finally ended our three decades of generous taxpayer support for ethanol blending. It's bad enough to subsidize domestic ethanol production from corn, but subsidizing Brazilian sugar companies to produce ethanol in their country would be a travesty, yet that's exactly what we'd do if we eliminated the tariffs without eliminating the Volumetric Excise Tax Credit, too.