ETHANOL POWERED: The Chevrolet Avalance can be fueled by ethanol. (Photo: GM) READY TO GO: Tanker trucks fill up with ethanol at a distribution facility in Brazil's São Paulo state. (Photo:  UNICA)        Font Size ..... Small Normal Big Very Big

PY PAUL CONSTANCE
IDBAmerica

“If Brazil can do it, we can do it here in the United States.”

Maria Cantwell, a U.S. Senator for the state of Washington, made headlines last May with this statement about Brazil’s use of ethanol to achieve energy independence. She joined a chorus of politicians, business leaders and opinion makers around the world who have been touting biofuels as part of the solution to the problems caused by high petroleum prices.

Indeed, Cantwell’s remark showed that expectations surrounding biofuels have grown so inflated that they are no longer tethered to reality. The United States consumes nearly 25 times as much gasoline as Brazil, according to the American Petroleum Institute. Replacing 40 percent of that consumption with ethanol—as Brazil has done—will be physically impossible for the foreseeable future.

Yet Cantwell is not the only prominent U.S. leader to cast Brazil—and Latin America in general—as a potential model in the race to develop more and better biological alternatives to oil. During a conversation with IDB President Luis Alberto Moreno at a conference at IDB headquarters in June, former U.S. President Bill Clinton argued that Latin America has the conditions to “lead the world” in biofuels. He said an ambitious push into alternative energy by region’s governments would generate jobs, safeguard the environment, and give Latin America a competitive advantage in the global economy.

Do Latin American politicians share Clinton’s vision? Are the various industries involved in producing and distributing fuels in Latin America willing to make the substantial adjustments necessary for such a change?

A CLEAR OPPORTUNITY

The case for optimism is well known. Though many biofuels are still unproven, ethanol (which can be derived from sugar, corn or other crops) has a long history as supplement or substitute for fossil fuels. Ethanol produced from sugar cane is by far the most cost-effective biofuel currently on the market (much more so than corn-based ethanol), and few parts of the world have a better combination of soil, climate, available land and low labor costs for sugarcane cultivation than Latin America and the Caribbean.

The technology for distilling sugar cane ethanol and blending it with gasoline is comparatively inexpensive and easily obtainable. Virtually all new automobiles and most old ones can run on gasoline mixed with up to 10 percent ethanol, and millions of “flex-fuel” cars that run on either fuel and their blends in any proportion are already on the road. China, India, and most industrialized countries have adopted or are considering targets for ethanol–gasoline blends that could create a vast international market for ethanol in the near future. Ethanol production could also generate employment in rural areas, decrease dependence on imported fuel, and lower carbon emissions. Finally, countries that are starting an ethanol program from scratch will be able to buy the latest and most efficient distilling and refining technologies, which can co-generate electricity for sale to the national grid by efficiently burning bagasse (the dry, fibrous material left over after the extraction of juice from sugar cane).

Yet despite these advantages, Latin American countries other than Brazil have done little to tap their ethanol potential. This is true even in countries that are net importers of fossil fuels—a category that includes all of Central America and the Caribbean with the exception of Trinidad and Tobago. In oil-exporting Mexico, studies have shown that adopting a 10 percent ethanol blend for its domestic gasoline consumption would save nearly US$2 billion per year currently spent to import gasoline and additives. Nevertheless, ethanol production in Mexico is still negligible.

Why haven’t more Latin American countries followed Brazil’s example? Until recently, the immediate reason was the low price of petroleum. When oil sold for less than US$30 per barrel, cane growers in most countries could earn better returns from producing sugar than ethanol. (Even in Brazil, growers have traditionally switched between sugar and ethanol production depending on fluctuations in the price of each commodity). But the bigger reason is that an ethanol program like Brazil’s requires a decades-long commitment by successive governments, elaborate system mandates, subsidies and incentives, and large expenditures in research and development.

BIRTH PAINS

Should they attempt to launch a comparable program today, other Latin American countries would face significant obstacles. In countries with oil extraction industries, established fuel producers tend to see ethanol as a competitor that will erode their market share. This resistance is especially significant if oil companies also control the distribution systems and filling stations whose storage tanks must be carefully cleaned and waterproofed before they can hold ethanol-blended fuel.

The automobile industry can also resist the introduction of ethanol blends. Despite the fact that multinational auto manufacturers such as Volkswagen, General Motors and Ford are openly supportive of ethanol-blended gasoline, their dealers in Latin American countries must contend with popular misconceptions regarding ethanol. Many people mistakenly believe that even small amounts of ethanol can damage their car’s engine or compromise its performance, for example. Unless they have strong incentives to do so, auto dealers are unlikely to take on the job of educating their customers about the benefits of ethanol.

Ironically, sugar cane growers themselves can be among the most formidable opponents of ethanol production. In many Latin American countries, the sugar cane industry has a complicated history of combative labor relations and frequent government intervention. Governments have tended to protect sugar producers with subsidies and regulations that artificially inflate the price of sugar. Dismantling these regulations into order to encourage a switch to competitive ethanol production entails political risks that many governments will be reluctant to take.

Finally, in countries with limited extensions of arable land, a large-scale expansion of sugarcane cultivation will almost certainly come at the expense of existing food crops or, worse yet, native forests. New sugar cane plantations are thus likely to face opposition from agricultural interests or environmentalists.

FIRST STEPS

Despite these risks, a majority of Latin American governments seem to be moving toward the creation of serious ethanol programs. According to Garten Rothkopf, a consulting firm in Washington, D.C., that is preparing a comprehensive study of ethanol markets for the IDB, Argentina, Costa Rica, Colombia, El Salvador, Jamaica, Mexico, Nicaragua, Paraguay, Peru, and Venezuela have either launched or are planning biofuel programs of some sort. Many of the region’s leaders have spoken in favor of adopting biofuels, and several have solicited help from the Brazilian government.

Early this year Costa Rica’s national oil company, RECOPE, signed a technical cooperation agreement with its Brazilian counterpart, Petrobras, to study the feasibility of blending ethanol with Costa Rican gasoline. The agreement was part of a broad strategy to rapidly expand the use of biofuels and alternative energy sources by 2020. In February of this year, Costa Rica launched a six-month pilot project to test the feasibility of introducing 5 percent to 10 percent ethanol-blended gasoline in 64 gas stations in the country’s Central Pacific region. In a sign of how globalized the nascent ethanol market has already become, Russian petroleum giant Lukoil won the contract to supply RECOPE with ethanol for the pilot project—ethanol it had purchased from a Brazilian producer.

William Ulate Padget, RECOPE’s Manager of International Commerce and Development gave a preliminary report on the pilot project at an August 25 meeting in San José of the Mesoamerican Biofuels Working Group, which was formed earlier this year by Central American countries with the participation of Mexico, Colombia and the Dominican Republic and support from the IDB. Ulate’s presentation offered a sobering look at just how difficult it can be to roll out a large-scale ethanol program.

Although RECOPE carried out an information campaign for the pilot project that included radio, television and print media and meetings with all relevant stakeholders, the reaction among consumers was unenthusiastic. Sales of regular gasoline, which was blended with ethanol for the pilot program, declined sharply at the participating service stations, while sales of “super” grade gasoline (which was not blended with ethanol) increased, apparently as a result of consumer concerns that the blended gasoline would harm their autos or impair performance. Media coverage of the pilot program was largely negative, with reports quoting misinformed auto mechanics that advised against buying blended fuel. RECOPE has concluded that a much more extensive communication and education campaign will be necessary in order to meet Costa Rica’s target of substituting 7 percent of the nation’s gasoline with ethanol by late 2008.

For Arnaldo Vieira de Carvalho, an IDB sustainable energy specialist who was involved in Brazil’s ethanol program from its inception, this comes as no surprise. “We had similar problems in Brazil during the early stages of the program,” Carvalho said. “It can take years for all the pieces to come together. That is why it is so crucial to have a sustained, well-coordinated strategy that engages all the stakeholders, supports research to improve sugar cane varieties and processing methods, provides financial incentives to private investors and generates confidence among consumers.”

A GLOBAL MARKET?

Even in Brazil, which can take legitimate pride in its ethanol program, the future holds a new set of challenges. Despite their impressive output, for example, the country’s sugar producers are highly fragmented and in some respects, quite inefficient. If a large-capacity fuel tanker were to arrive at a Brazilian port with the intention of filling up with ethanol for export, for example, some industry observers estimate that it would take as many as 100 different Brazilian suppliers to fill the order. Each supplier would also have to make separate arrangements to transport the fuel by truck, because Brazil does not have a pipeline network for ethanol.

In other words, before ethanol can be traded as a large-volume commodity on the international market, even Brazil’s mature ethanol industry will need to consolidate and invest heavily in transportation infrastructure and logistics. Both public and private entities in the country appear to be rising to this challenge. Brazil’s ethanol producers association has announced plans to expand production with the goal of doubling exports by 2010, to around 5 billion liters per year. According to Garten Rothkopf, 89 new ethanol distilleries are either planned or under construction in Brazil, and the country’s ethanol production capacity is growing at around 8 percent per year.

Petrobras, which once resisted the government’s ethanol initiative, has now made biofuels part of its strategic plan. Late last year Petrobras formed a joint venture in Japan to import and distribute Brazilian ethanol in that country, and the company is also studying the feasibility of a US$225 million pipeline that would transport ethanol from sugar cane growing areas in Brazil to an export terminal in São Paulo state by 2008.

Brazilian ethanol producers are actively looking to expand exports to the United States, despite a 2.5 percent ad valorem plus a 54-cent-per-gallon tariff that the United States imposes on direct imports of the fuel. In order to skirt the tariff, Brazilian producers have purchased ethanol processing facilities in El Salvador and Jamaica that have duty-free access to the United States through the Caribbean Basin Initiative. Investors in Guatemala, Panama and the Dominican Republic are also reported to be working with Brazilian partners to plan new ethanol distilleries.

The bigger problem, for now, is that the global trade in ethanol is still miniscule (by some estimates, less than 10 percent of all ethanol production is exported).

Brazilian authorities have repeatedly said that they want other countries to begin producing ethanol because only a multinational industry will be capable of reliably supplying a commodity market for ethanol. To that end, the IDB is in discussions with the Brazilian government to develop a pilot program to promote the creation of regional ethanol and biofuel markets. The IDB is also financing biofuel feasibility studies in several Central American countries and is assisting the government of Mexico in preparing a comprehensive biofuel policy.

Republished with permission from IDBAmerica, the magazine of the Inter-American Development Bank.