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May 16, 2006 12:25 am

Ethanol puts power in Brazil’s tank

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For the world’s gathering troupe of cheerleaders for ethanol as fuel for cars, the economic argument is clear. When produced at its cheapest, ethanol comfortably undercuts the price of petrol and emits far less carbon dioxide.

But as well as heading off global warming, could ethanol also contribute to energy security as western governments fret about increasingly unpredictable and volatile supplies of oil and gas?

By far the world’s most efficient producer is Brazil, which distils ethanol from sugar cane. Brazil has about half the world’s sugar export market and aims to produce 40 per cent more ethanol by 2010.

Apart from its long campaign to persuade Washington to dismantle steep US import tariffs, Brazil recently reached an agreement with Japan, a big oil importer, to examine the potential for a switch towards ethanol. It is also talking to European governments. “The market is growing very quickly,” Luiz Fernando Furlan, Brazil’s trade minister, told the Financial Times last week. “It is good to see that there are moves in this direction around the world.”

The trend may also help Brazil to regain some of its influence in global policymaking circles after its eclipse by Latin America’s radical axis of presidents Hugo Chávez in Venezuela and Evo Morales in Bolivia.

Buoyed by soaring fuel prices, these presidents seem intent on playing politics with their oil and gas, with Mr Chávez insulting the leaders of the US and European Union while offering their poorer families subsidised petrol. Mr Chávez, seen by some as bent on exporting revolution, also buys regional influence by offering cheap fuel to central American and Caribbean countries. Brazil, meanwhile, exports both ethanol and the expertise to make it, which may be of more lasting benefit.

Brazil’s campaign of investment and technology transfer combines the “teach a man to fish” adage with tactical motives. First, it enlarges the global ethanol business and hence its lobbying power. Second, it may disarm some developing countries’ resentment of Brazil’s dominant role in world trade. Third, it promotes Brazil globally as a relatively moderate and apolitical supplier of fuel.

“President Lula [da Silva] has made it clear that we should offer our technology and expertise in both ethanol and the automotive sector to other countries,” Mr Furlan said, referring to the fact that Brazil is also a world leader in making “flexfuel” cars that run on either ethanol or petrol. He lists central American states such as Guatemala, Honduras and Costa Rica as potential ethanol exporters.

A few years ago, Brazil famously won a case against the EU’s sugar regime at the World Trade Organisation, since when Brussels has announced big cuts in guaranteed EU prices for sugar farmers. The landmark case helped further to elevate Brazil’s considerable influence within the World Trade Organisation. But it was a blow for the poor African and Caribbean nations that had special access to the EU sugar market at three times the world price.

By encouraging ethanol production and refining in the Caribbean, many of whose countries have special duty-free access to the US ethanol market, Brazil can both soften that blow and increase its own exports. Last year the Brazilian trading group Coimex started refining ethanol in Jamaica under a joint programme with Petrojam, Jamaica’s state-owned oil refinery.

Many of the Caribbean’s distillers are too small and inefficient to make much use of the tariff-free allowance. Brazil’s technology and investment may create one day a self-sustaining business in Jamaica. In the meantime, Brazilian sugar producers can in effect export ethanol to the US via the Caribbean, offering the Caribbeans a percentage of the take.

The irony is that if the US does abolish its tariff permanently, those countries that are currently competitive only because of their tariff-free privileges might struggle to survive.

Last week Marcelo Lessa, a senior official at the International Finance Corporation, the private sector arm of the World Bank, said it had received a slew of requests from round the world to invest in ethanol production, including some from central America.

“We’ll turn several [requests] down because we believe ethanol production has to be competitive with costs in Brazil,” Mr Lessa told Reuters last week. “Otherwise you might be hurting a country economically.”

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