Brazil seeks to produce enough ethanol to replace 10% of the gasoline consumed worldwide by 2012, which requires doubling its current production and increasing the share of exports in total output to 20% from the current 15%.


Brazil seeks to produce enough ethanol to replace 10% of the gasoline consumed worldwide by 2012, which requires doubling its current production and increasing the share of exports in total output to 20% from the current 15%.

For over three decades, Brazil has been a global leader in the production and use of sugarcane based ethanol or ethyl alcohol, a fuel additive that has reduces country's petroleum consumption. Two years after the first global energy crisis in 1973, the Brazilian government introduced its ethanol initiative to decrease dependence on world energy supplies. At its height in the mid-1980s, more than three quarters of the 800,000 cars produced in Brazil each year ran on ethanol. However, by 1990, a decline in the supply of sugar based fuel brought the sale of ethanol-powered cars to nearly drop to zero. Since their launch, "flexible-fuel" cars have helped re-ignite ethanol production in Brazil. Today, more than half of all cars in the country are "flexible-fuel" cars. At the same time, ethanol production efficiency has tripled since 1975.

The oil crisis of the 1970s led the Brazilian government to address the strain high prices were placing on its fragile economy. Brazil, the largest and most populous country in South America, was importing 80% of its oil and 40% of its foreign exchange was used to pay for that imported oil. In 1975, General Ernesto Geisel, then-president of Brazil, ordered the country's gasoline supply mixed with 10% ethanol. The level was raised to 25% over the next five years, which was intended to maintain a constant Brazilian gasoline supply for an ever-increasing demand. The government assisted the shift by giving sugar companies subsidized loans to build ethanol plants, as well as guaranteeing prices for their ethanol products. Already the world's biggest producer and exporter of sugar, farmers reaped the benefits of this new demand.

The 1979 Iranian crisis and related oil price shock accelerated Brazil's conversion of its gasoline supply and automobile fleet. Under the Proalcool Program, sugar companies were ordered to increase production and the state-run oil company, Petrobras, was required to make álcool (ethanol) available at its fuel stations. The growth in hydrous ethanol, which uses a blend of 94-95% ethanol to 5-6% water, rapidly increased during the 1980s, with consumption peaking in 1989.

Automobile manufacturers were given tax breaks to produce cars that ran on hydrous ethanol, and, by 1980, every automobile company in Brazil was following this lead. By the mid-1980s, three quarters of the cars manufactured in Brazil were capable of running on sugarcane based hydrous ethanol. However, the drop in oil prices throughout the 1980s and 1990s made it uneconomic for the Brazilian government to continue its hydrous ethanol program. Both production and consumption of ethanol were basically flat for much of the mid-1980s to the mid-1990s. After 1995, both production and consumption of ethanol began falling quickly. The Brazilian government's dedication to the ethanol industry declined and incentives given by the government wore off, causing ethanol fueled vehicle production to decline in the late 1980s to early 1990s. As oil prices decreased in the 1990s, the consumer acceptance of ethanol fueled cars greatly decreased and purchases of gasoline fueled automobiles returned to previous levels.

The second wave of ethanol fuel production and consumption in the Brazilian market began in the 1990s when the use of anhydrous ethanol started to rise. Anhydrous ethanol is a type of fuel which is more easily combined with gasoline for automobile fuel. The consumption of hydrous ethanol has grown steadily since the 1990s, peaking in 2003. The start of the new millennium brought with it increased oil prices, which in turn sparked a resurgence of Brazil's drive toward energy independence, including a revival of its ethanol program. Although it previously used a hydrous ethanol blend, Brazil shifted toward the aforementioned anhydrous ethanol, which is used in a ratio of ethanol to gasoline of 20-24:80-76. Brazil introduced its current generation of ethanol-powered cars in 2003, the same year in which hydrous ethanol consumption peaked. Named flex fuel vehicles (FFVs), these automobiles run on gasoline, ethanol, or any blend of the two. When the car is filled at the pump, an internal system analyses the mix of the two fuel types and adjusts accordingly. The first such vehicles were introduced by Volkswagen in 2003, and by 2004, they accounted for more than 17% of the Brazilian auto market. In 2005, their sales increased even further, accounting for approximately 54% of all new car sales.

The combination of high sales of flex-fuel vehicles and high oil prices further caused Brazil to increase its ethanol production to accommodate an anticipated auto industry demand. In 2005, it produced approximately 285,000 barrels of ethanol per day, an increase from the approximate 200,000 barrels per day in 2002. In 2005, 102 million barrels of ethanol were produced, of which 84 million barrels of ethanol were consumed. The surplus was exported, making Brazil the world's largest ethanol supplier.

Yet even with this positive balance of trade and production, ethanol accounted for only 13.6% of Brazil's total transportation fuel consumption in 2005. The consumption of 84 million barrels of ethanol was 13.6% of total oil equivalent consumption of 620 million per year. More than 535 million barrels of other fuels, including gasoline and diesel fuel were consumed. The remaining 86% of Brazil's transportation fuel demand is met by petroleum, and increasingly that petroleum is coming from domestic Brazilian sources. Exemplifying the importance of domestic oil production and exploration, the very declaration of Brazil's energy independence came during the inauguration of a new oil platform that is claimed to create higher domestic oil production than consumption for the first time in Brazil's history.

Role of the Sugar Industry

Rising ethanol demand in global markets is driving the growth of Brazil's sugar/ethanol complex with new investments in infrastructure and technology. The recent rise in crude oil prices, paired with a global effort for renewable energy development and a growing domestic demand for ethanol have been the key factors driving the recent expansion of Brazil's sugar and ethanol industries. As ethanol in Brazil is made from sugarcane, sugar industry developments are now increasingly linked to policy initiatives in ethanol markets. Sugar represents a particularly important component of Brazil's economy, with the sugar/ethanol industry contributing 2% to national GDP. The value of production in 2006 reached $8 billion, which represents 17% of the country's agricultural output. The sugar sector generates 21% of total exports and employs 1 million people, or 2% of the labor force.

Brazil's total sugarcane production, equivalent to 31% of the global production in 2006, reached 423 million tons. Brazil is also the largest raw and refined sugar producer, accounting for 20% of the global sugar production. Growing global interest in Brazil's ethanol sector and developments in the sugar industry significantly affect country's sugar production which reached 28.7 million tons in 2006. Brazil exported 18.3 million tons of sugar, accounting for 41% of the world's sugar exports. Brazilian ethanol exports in 2006 of 1 billion gallons represented 52% of the world's ethanol market.

Flex-Fuel Vehicles of Brazil

In 1980s, millions of Brazilians switched to the alcohol-only cars, but the 1989 shortage of alcohol left enraged motorists unable to fill up and drive their cars. Further, the falling oil prices in the 1990s lead to the sharp decline in of alcohol-only cars in Brazil. But flex-fuel cars sales took off after the vehicles started selling in 2002, totaling 50,000 through the end of 2003. Currently, the Brazilian light vehicle fleet of 18 million units consumes 7.3 billion gallons of fuel per year: 4.2 billion gallons/year of gasoline and 3.1 billion gallons/year of hydrated or anhydrous ethanol. Ethanol is used almost exclusively for passenger cars and trucks; buses and work vehicles are powered by diesel.

Brazil hopes to export flex-fuel cars and technology around the world, and according to auto industry executives the interest from abroad is increasing. So far, Volkswagen has hosted delegations from Australia, China, England, India, Japan and South Africa. Other nations like the United States are promoting a fuel mix consisting of 85% alcohol and 15% oil, but experts say it will take years - if not decades - for true flex-fuel cars to be sold outside Brazil.

Ethanol Costs and Pricing

Brazil, the world's leading ethanol exporter, also has the world's lowest cost of producing the Biofuel. There are no clear statistics for the cost of production of ethanol in Brazil, analysts believe that it ranges anywhere from between BRL0.40 to BRL0.60 ($0.21-$0.31) per liter, depending on the mill and whether the sugarcane mill buys its sugarcane from suppliers. For mills buying cane, the cost to produce ethanol is about BRL0.56 ($0.29) per liter, since the cost of a ton of sugarcane is BRL38.00 ($19.80). For those who have their own sugarcane, the cost is less, perhaps as low as BRL0.48 per liter. According to Sao Paulo's Institute of Agricultural Economics, the average price of producing ethanol was estimated to be between BRL0.40 to BRL0.45 per liter; however, the Agricultural Ministry's figures are around BRL0.55 per liter.

Ethanol prices are rising in the domestic market as Brazil while demand from flexible fuel vehicles increases. Brazilian government is analyzing a proposal to lower the ethanol mixture in gasoline to 20% from the current 25% while the country is short on supply. The plan may help lower ethanol prices. Still, gasoline prices may increase as a higher proportion of the fuel in the mixture would make it more expensive to consumers. Further, Brazil is increasing the area planted for sugarcane as domestic and international demand for ethanol boosts prices and profit. Ethanol prices in the international market may keep rising as the fluid is used for fuel and as a substitute for oil derivatives in the chemical industry. Around 40 sugar mills and distilleries were under construction in Brazil in 2006. Farmers have boosted area planted in cane by 4.5% to 5.88 million hectares, or 14.5 million acres. Brazil may harvest up to 30 million tons more sugarcane in the 2006-2007 crop, raising ethanol production to 18.3 billion liters and sugar output by 1 million tons to 27.7 million tons.

The sustained capacity to improve and diversify its production by investing in R&D is one of the most important factors underlying the success and growth of Brazil's ethanol industry. Sugarcane productivity has risen steadily at a 2.3% growth rate between 1975 and 2004. Industrial productivity growth is not as brisk, increasing on average 1.17% since 1975.

This growth rate is the result of new variety development, biological pest control introduction, improved management, and greater soil selectively. These efforts were initiated by the Sao Paulo state government's the Instituto Agronômico de Campinas (IAC) and Instituto Biológico. By 1970, Copersucar, a private cooperative of sugar and cane producers, created a Center for Technological Research. This research center was instrumental in the expansion of sugarcane production and the industrial development of the sector. In 1971 the federal government created the Programa Nacional de Melhoramento da Cana-de-Açúcar (Planalsucar) with a particular focus on the development of new sugarcane varieties. Planalsucar was created to reduce the technology growth rate difference between industry and production within the Brazilian sugarcane sector. With industry developing faster, an agricultural production lag could eventually result in bottlenecks for sugar and ethanol producers.

Future growth of the sector continues to depend on sugar exports and domestic sales of ethanol, but ethanol exports are now a strategic variable for this industry. The importance of the latter can be better understood considering that by now Brazil has already substituted a great deal of gasoline for ethanol. Production of ethanol, if based just on the domestic market, will accompany economic growth and the increase in automobile demand. However, Japan, the US, and the European Union still have a long way to go to in the substitution of gasoline. This may be the source of a big push, one that can double or triple current levels of ethanol production.

Brazil seeks to produce enough ethanol to replace 10% of the gasoline consumed worldwide by 2012, which requires doubling its current production and increasing the share of exports in total output to 20% from the current 15%. Sugar exports are also forecast to increase, with the share of sugar produced going to the export market increasing to 70%.

According to the projections of the government's energy research company EPE, Brazil's ethanol production is expected to total 66.57 billion liters by 2030. The current 5.6 million hectares destined for ethanol production will stand at 13.9 million hectares in 2030; the increase, however, will come from pasture land. At present, Brazil has 210 million hectares of pastures and it is possible that it would be cut in half without harming the cattle. The strong increase in Brazil's ethanol production will enable the country to gradually raise its future ethanol exports. In 2030, Brazil's ethanol exports are forecast to total 12 billion liters. The country's ethanol domestic consumption is expected to total 54.7 billion liters in 2030.

According to the Brazilian Ministry of Agriculture by 2008, over 60% of harvested cane is expected to go into ethanol production as ethanol production facilities continue to be built. Planting of sugarcane and construction of new sugar/ethanol mills generally require a startup phase of 3-5 years. Despite recent rapid growth and new investments in the sector, ethanol supply still lags behind demand.

While ethanol production remains a priority for the Brazilian government, oil production and exploration accounts for the majority of Brazil's progress toward energy independence. Oil still accounts for a major part of Brazil's fuel usage and efforts to improve the efficiency and increased productivity of its oil platforms are well underway.

The revived ethanol program does indeed provide a fraction of Brazil's energy needs. Increased levels of production and greater mechanization of sugarcane farming makes Brazil the largest producer and exporter of sugarcane and ethanol in world. The claim of energy independence, however, requires careful examination and interpretation. Ethanol alone has not created an energy independent Brazil; rather, increased oil production has most significantly contributed to achieving that goal.

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The content & opinions in this article are the author’s and do not necessarily represent the views of AltEnergyMag

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