Brazil: less ethanol, less fuel inflation?

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Filling up your car in Brazil can be a little complicated.

About 90 per cent of all new cars are built with “flex-fuel” engines that can run on both petrol and ethanol. So when you get to the petrol station, the attendant (no self-respecting Brazilian ever fills up their own car) will ask you which one you want.

Given that ethanol is less efficient than petrol, the price per litre needs to be about 30 per cent cheaper or more than that of petrol to make it worth it.

It’s not uncommon to see the more penny-pinching Brazilians getting out the calculators on their mobile phones at this stage. There are even websites that do the sum for you.

In short, drivers generally choose ethanol because it is cheaper, not because they are trying to save the environment.

The government follows a similar logic it seems. Edison Lobão, Brazil’s mining and energy minister, this week reduced the ethanol component in petrol from 25 per cent to 20 per cent.

(To make things more complicated, all ‘petrol’ in Brazil actually has a small amount of ethanol mixed in. The government occasionally changes the ethanol ratio to smooth out the effect of price spikes).

The reasoning this time is that ethanol has become so expensive recently that it is pushing up the price of ‘petrol’ at the pumps. By reducing the ethanol component, petrol should be a little cheaper. By freeing up ethanol supplies, it should also make pure ethanol cheaper.

But not everyone agrees. Unica, the country’s cane industry association, argues that this won’t affect ethanol supply in the domestic market. This is because Brazil has resorted to importing ethanol. If less ethanol is needed, imports can just be reduced.

Aside from serving as a mind-boggling case study of supply and demand, the government’s latest decision may also be a glimpse of the future.

Brazil’s state oil company, Petrobras, is currently sitting on an estimated 50bn barrels of oil in the ‘pre-salt’ area recently discovered off the coast of Rio de Janeiro.

When this starts hitting the domestic market, it is hard to believe that ethanol will remain as popular as it is today. Like Brazilian drivers, when the government stops to compares prices, perhaps it will just as easily opt for fossil fuels over the environment.

Related reading:
Brazil’s ethanol producers take a big bet on biofuels, Energy Source
Brazil’s ethanol production in focus, beyondbrics
Brazil looks to US to kickstart biofuels, FT
Petrobras to boost ethanol production, FT

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