Fuel prices rise, Brazilians go after Big Sugar

Another guest post, this one from quasecarioca, who follows environment and sustainability issues in Brazil. The last guest post, on iron miner Vale, deserved a wider readership, as it was a very smart analysis of what’s up in Brazilian capitalism. Read this one, then read that one.

Brazil's national patrimony, shamefully handed over to fuel the capitalist bodies of Boston's financial district rather than being burned in the automobile engines of Sao Paulo. Photo taken today at Dunkin Donuts.

Who’s to blame for pricey gasoline? In the U.S. it’s usually pinned on Big Oil or Big Government. In Brazil these days, drivers are furious with Big Sugar – demanding action against sugar mills much the way Americans like to call for Congressional investigations of fuel prices. But Brazil’s tantrum about sugar producers is a seasonal affair that we’re likely to see until the country deals with the imbalances in its growing biofuels program.

Sugar cane ethanol in Brazil now provides almost half the fuel used by the country’s fleet of light vehicles, primarily because of the widespread use of “flex-fuel” engines that run on any combination of gasoline and ethanol. This has substantially reduced the use of fossil fuels by cars and spurred a huge biofuels industry that actually generates both profits without massive government subsidies and creates a substantial amount of energy, unlike the U.S. corn ethanol program which struggles to do either. (Those of you interested in flaming me for being on the wrong side of the food vs. fuels debate, I’m happy to address that in a separate post).

But cane ethanol faces the problems of most alternative forms of energy – its production depends on seasonal and climate circumstances. Brazil’s sugar cane crop ends around October and starts up again around now, leaving a gap when ethanol production goes down and prices rise. Supplies this year are even more limited because of an additional variable – high sugar prices that lead mills to cut biofuels output and boost production of the sweetener, which generally goes toward the export markets.

So once again, it’s that time of the year. No self-respecting politician is going to stand idly by while unscrupulous sugar mills cause the suffering of innocent flex-fuel drivers for the sake of profits derived from supplying foreign markets. We start hearing the same proposals pulled off the shelf – state-set production targets, a sugar export tax, limits on financing for mills that focus on sugar instead of biofuels (never mind that they generally make both and alter the output of each based on the economy). The entrance of big oil firms including Shell and BP as players as in the country’s ethanol business — foreign participation in the sector nearly doubled in 2010 — has only added fuel, so to speak, to this nationalist fire.

But like the USA’s constant fuel headaches, this particular problem will not be solved by going after greedy capitalist sugar millers – though truth be told they are not always a pretty bunch. They’ve been linked to quite a few substantiated accusations of cutting down native vegetation and holding workers slave-like (fortunately they’ve improved on both of these counts in recent years). Nonetheless, the underlying problem is that the sector can’t keep up with the booming demand for liquid fuels caused by an expanding middle class that is buying more cars. Demand is growing so quickly that even Petrobras – which is run by the state – is struggling to meet gasoline demand, evolving over the last two years from an exporter of the fuel into an occasional importer.

The government has promised to have Petrobras sort this out, exhorting the company to expand its biofuels production unit. The company is already an ethanol producer, but almost all of its portfolio has come through acquisitions rather than new construction. This doesn’t change the amount of supply, just the name of the company supplying it.

Of course one of the best ways to quash any serious expansion of ethanol production is constantly brandishing tax measures or threatening to change the rules the game. Despite the growing consolidation, the sector is still largely a fractured group of relatively small businesses that were hit hard by the financial crisis in 2008 and have struggled to come back. The key here is to have a nation-wide storage system that can release ethanol during the inter-harvest to even out prices throughout the year. But it’s a lot easier to kick and scream and call for Congressional investigations until ethanol prices start falling at the pump (they’re already starting to) and people forget about this problem. Until the issue starts up again in October or November, at which point we’ll probably be right back where we started.