Brazil hopes to build on its ethanol success

RIO DE JANEIRO — Drivers here can fill up their cars with just about any imaginable fuel — except plain old gasoline.

A worker cuts sugar cane in São Tomé, Brazil, to be transformed into ethanol.
By Victor R. Caivano, AP

A three-decade-long alternative energy campaign has outfitted Brazilian filling stations with fuel pumps that offer pure ethanol, a blend of gasoline and 20% ethanol called gasohol, or even natural gas. This year, Brazil will achieve energy independence — a goal the United States has been chasing without success since the energy crises of the 1970s.

Now, even as the U.S. haltingly sets out on the path Brazil blazed, producers here are drawing up plans to transform sugar-cane-based ethanol from a national success to a global commodity. Brazilian companies are investing $9 billion in dozens of new sugar mills to boost ethanol production while aiming to double exports by 2010. The eventual goal is to spread new ethanol industries in countries from Japan to Nigeria.

"We are moving fast to the wholesale export of ethanol. ... We're investing in infrastructure in Brazil to make it easier to export in large quantities," says Jose Gabrielli, chief executive of the state-owned oil company Petrobras, which oversees ethanol sales abroad.





In the USA, ethanol imports are expected to surge from modest levels this year as refineries phase out a gasoline additive called MTBE, says the Energy Information Administration. But Brazilian ethanol won't do as much as it could to help the U.S. reduce Middle Eastern oil imports because of domestic trade protection.

In 2005, the U.S. produced 3.9 billion gallons of fuel ethanol and imported 109 million gallons, almost all from Brazil. By expanding purchases of Brazilian ethanol, the USA could curb what President Bush has labeled its oil addiction. But the U.S. imposes a 54-cent-a-gallon tariff to discourage imports and protect domestic farmers. American ethanol is produced from corn, which costs more and produces less energy per unit of input than sugar cane.

"The U.S. is paying much more for gasoline in the world market than it could be paying for ethanol, not only produced in Brazil but also in all sugar cane countries," says Plinio Nastari, president of Datagro, a São Paulo-based consulting firm.

Earlier in the series

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Brazil's agricultural exports cast long shadow
Comeback kid Embraer has hot jet, fiery CEO to match




Last year's Brazilian ethanol exports of 684 million gallons were more than 10 times the 2000 figure, Datagro says. This year, soaring domestic demand has pinched supplies and raised prices, which are expected to keep foreign shipments about flat, Nastari says. Brazil accounts for 53% of the embryonic global ethanol trade; Europe is a distant second with a market share of 12%.

Ethanol interest in the USA has mushroomed since Bush's January State of the Union address. The president called for reducing by 2025 the USA's dependence on imported oil by 75% in part by accelerating research into new fuels. Among them: a new type of ethanol made from "wood chips, stalks or switch grass" that Bush hopes can be commercially viable within six years.

Chief executives since President Carter have set similar goals, yet the USA still imports 59.8% of its petroleum needs — more than after the second oil shock in 1979.

Brazil leads in ethanol production

Brazil's ethanol program started in 1975, when soaring oil prices put a chokehold on the economy. In response, the country's military rulers launched an effort to free themselves from foreign oil — which then accounted for almost 90% of oil consumption — by developing innovative fuels. Ethanol made from sugar cane was an obvious candidate, given Brazil's almost endless amount of arable land and favorable climate.

Years of work and billions of dollars in subsidies later, Brazil is the world leader in ethanol production. It hasn't always been smooth sailing. The first ethanol-only vehicles were tough to start on cold mornings. Sugar mills responded to high world sugar prices in the late-1980s by producing more sugar and less ethanol, resulting in fuel shortages that left drivers fuming and seriously dented the program's reputation for reliability. By 2002, the ethanol-powered cars that were ubiquitous in the '80s represented just 3% of the market.

But in 2003 automakers rolled out "flex-fuel" cars, able to run on ethanol, gasoline or any mixture of the two. For drivers, the new cars eliminated the need to bet on a fuel type.

Oil prices top $66 a barrel

WASHINGTON — Oil prices rose above $66 a barrel for the first time in nearly two months Tuesday as tensions in oil-producing countries and expectations for a strong summer driving season lifted prices.

The price of a barrel of crude oil trading in New York rose $1.91, or 3%, to $66.07. That was up $4.66 from a month ago and the highest price since Feb. 1.

The increase in prices was led by political unrest in oil producers Nigeria and Iran, a potential labor strike in Norway and regular closures of refineries for maintenance.

A report showing a sharp increase in consumer confidence in March also strengthened expectations that Americans would keep driving to shopping malls and would hit the roads for summer vacations. That would lead to higher demand of gasoline, and in turn, oil, says Phil Flynn, oil analyst at Alaron Trading in Chicago.

"The combination of all of that kept the markets under buying pressure," Flynn says.

He says oil prices may reach $69 a barrel as early as next week and could hit $75 a barrel this summer, particularly as investors keep an eye on expectations for a strong hurricane season, which could hamper U.S. production and slow imports.

For consumers, that will likely mean higher prices at the pump. Motor club AAA Tuesday said the average retail price for a gallon of regular gasoline was $2.50, up 26 cents from a month ago and 37 cents from the same time last year.

Brian Kahn, market analyst at First Enercast Financial in Denver, says a nationwide average of $3 a gallon, which was seen in the aftermath of Hurricane Katrina, is "very attainable." He notes the price of oil at the start of last summer's driving season was $57 a barrel. Oil accounts for about half of the cost of retail gasoline prices.

—Barbara Hagenbaughi USA TODAY




Today, 70% of new car sales are "flex," which are visibly indistinguishable from conventional cars. Only the "gasolina/alcool" label inside the gas tank lid gives them away. (Alcool, pronounced owl-cool, is the local term for pure ethanol.)

"You don't have to choose one or the other. It takes any mix," says Antonio Claudio, 45, a Volkswagen salesman.

Cars get fewer miles from a gallon of ethanol than from a gallon of gasohol. So consumers operate by a rough rule of thumb: so long as ethanol's price is no more than 70% of gasohol's, which it usually is, it makes sense to buy. Local newspapers periodically run charts showing readers how to make the calculation.

Brazilian drivers can fill up with ethanol at 29,000 filling stations. In the USA, there are only 600 gas stations that sell the E85 fuel — a blend of 85% ethanol and 15% gasoline.

Brazilian drivers still consume more than 83% of the country's total ethanol production. But the export share has been growing for several years. Brazil already is shipping to nearby Venezuela, India and South Korea. Hopes for a major expansion of global ethanol trade revolve around Japan, which is considering mandating a 3% ethanol mix in its gasoline. If it does, worldwide demand would jump by one-third.

"We see good opportunities in Asia," says Alfred Szwarc, a representative of the sugar industry trade group Unica.

Global market still developing

Developing a true global ethanol trade likely will take several years. Before ethanol can become a commodity like oil or corn, it will need a single international quality specification and a futures market with an accepted reference price, Nastari says.

Brazil today has the physical capacity to export annually 2.2 billion gallons of ethanol, roughly three times the current level. But its network of producing mills lacks cost-effective means for moving ethanol to port facilities.

Today, ethanol shipments usually move from the field to port via tanker trucks, which are far less cost effective than an extensive pipeline network. Last month, Petrobras agreed with the Brazilian state of Minas Gerais to study a proposed pipeline from that region to the coast, which could transport 1 billion gallons annually.

"The existing infrastructure is not the most appropriate for ethanol exports. ... The cost could decrease a lot if the proper infrastructure were in place," says Paulo Diniz, chief financial officer of Cosan, Brazil's largest producer of both sugar and ethanol.

Its extensive use of alternative fuels makes Brazil — still a relatively poor, developing country — a world leader in ethanol. Its high-tech mills, which ingest raw sugar cane, strip its leaves and crush it into a watery paste, are able to switch within hours from production of sugar to ethanol, depending on which product claims the higher price.

But other countries aren't going to bet their fuel lifelines on ethanol unless they can be assured of dependable supplies. That will require the emergence of more than one major supplier. Underscoring the potential risks associated with a single supplier, tight domestic supplies in Brazil have pushed ethanol prices to record highs in recent weeks.

In the long run, Brazilian experts plan to help developing countries set up their own ethanol industries. Those that already produce sugar cane, such as Australia and India, are the leading initial candidates.

Brazilian ethanol makers also are interested in partnering with U.S. ethanol producers, Szwarc says. There have been talks with U.S. companies about cooperating to promote ethanol use in other countries or creating joint venture production operations, he says. Foreign investment also would be welcome in spurring an ongoing consolidation of the fragmented Brazilian sugar industry, populated by 120 enterprises.


By Victor R. Caivano, AP
Tanks holding ethanol are seen at the São Tomé, Brazil, distillery.

But for now, U.S. companies have their hands full meeting domestic demand, says Bob Dineen of the Renewable Fuels Association in Washington, D.C. Along with renewed interest in ethanol triggered by the president's speech, the phaseout of the gasoline additive MTBE, slated to occur before the summer driving season, will drive demand for ethanol beyond the capacity of domestic producers.

Even as the U.S. struggles, Brazilian companies are moving to boost production sharply.

"The real challenge today is to increase production to explore the opportunities we have in the sugar market and the export of ethanol," says Heloisa Burnquist, a researcher at the University of São Paulo's agriculture school. "... We don't have any constraints. It's just a matter of time and investment."


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