Brazilian energy

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Residents of the White House do not expect much of a welcome in Venezuela these days. Shoring up support in the region was one reason for President Bush’s trip to Brazil this summer. Now Petrobras’s discovery of a major oilfield off the Brazilian coast highlights why Mr Bush, or his successor, should visit more often.

Over the next few years, Brazil’s oil output should pass Venezuela’s, turning the country from a net importer to an exporter. That is before factoring in Petrobras’s Tupi discovery. Tupi may or may not contain the claimed 5bn to 8bn barrels of recoverable oil – a cynic might read into the assertion a defiant political message to neighbouring Bolivia, which nationalised Petrobras’s assets there last year. Still, peak production of at least 500,000 barrels a day is conceivable, which would make it one of the world’s largest producing fields.

Apart from the obvious benefits of more non-Opec supply, Tupi highlights Brazil’s exploration potential. But the opportunity is bigger than that. Brazil is the world’s largest producer of ethanol derived from sugar cane. As a fuel additive, it is cheaper and more energy-efficient than the corn-based variety that is subsidised and ringfenced by tariffs in the US. That policy distorts food prices and – because making corn-based ethanol is energy intensive – will eventually inflate prices (and import demand) for another fuel, natural gas. It would be more sensible for the US to switch subsidies towards more efficient but currently more expensive emerging ethanol types, such as that made from switchgrass.

The US should also phase out the tariff on Brazilian ethanol imports. That would make for a less-distorted market and open a growing source of competitive supply. Brazil might reciprocate by allowing US oil companies more access to its offshore regions. For America, the political snub to Caracas would be a bonus.

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