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.

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7 thoughts on “Fuel prices rise, Brazilians go after Big Sugar

  1. CarlosElio

    That may be a sweet problem for planners and the public in Brazil. You said you would be willing to address the debate food vs energy in a separate post, so forgive the violation of your plea, but my questions is not so much in the food vs energy debate, but in the efficient use of energy. I am not an expert in energy matters, but I remember reading somewhere that the energy consumed to produce one quart of ethanol is more that the energy delivered by that quart. They count planting, irrigation, harvesting, transportation, storage, and chemical processes. Is that true? What is the net balance between producing a unit of ethanol and the energy delivered by that unit?

  2. westslope

    To what extent is sugar cane ethanol production subsidized directly and indirectly by the Brazilian state?

    1. quasecarioca

      Hi westslope — Also a fair question. There is some interesting back and forth about that here, from the corn ethanol lobby

      http://biofuelsdigest.com/bdigest/2010/04/12/today-in-biofuels-opinion-yes-brazilian-sugarcane-ethanol-enjoys-generous-subsidies-by-the-brazilian-government/

      with a response here from Brazil’s cane ethanol lobby in the states.

      http://sweeteralternative.com/blog/on-ethanol-subsidies

      (Sorry, I’ve not yet figured out how to insert links into text in comments).

      What I think many would argue is a subsidy is the financing from state lender BNDES, which has become the main provider of long-term financing for the country’s industries. It’s presence is so heavy that it has sparked some complaints about unfair trade practices and even criticism by opposition politicians. But this financing is offered to most of Brazil’s industries ranging from cattle ranching to oil services.

      My personal take is that it’s hard to argue this compares with the enormous subsidies to corn production, the blenders tax credit for mixing ethanol with gasoline, and the tariff on imported ethanol that helps keep Brazilian biofuels out of the U.S. market (I say “helps” because right now they obviously don’t have enough to export anyway). Cheers, qc

  3. quasecarioca

    Hi Carlos — Thanks for your question . The energy return on any biofuel is going to depend on a lot of things that I’m also not expert on but I can give you some basics that I’ve read about. The measure people generally use for this is known as Energy Returned on Energy Invested, or for the energy nerds EROEI, which measures precisely what you’re asking — how much energy comes out for each unit of energy that goes into the process. An EROEI of 1 would be a break-even process in which no energy is gained.

    For the petroleum industry this is generally considered to be a factor of 10, though I imagine it’s going down these days as we drill further into deeper water for oil that takes more energy to refine. From casually poking around on the internet I’ve seen that Canadian tar sands have an EROEI of around 5.

    For sugar cane ethanol, when you include the electricity generated by burning sugar cane bagasse you get a factor of about eight. (I imagine this figure would be contested, particularly by the U.S. corn ethanol lobby) http://en.wikipedia.org/wiki/Ethanol_fuel_in_Brazil

    For corn ethanol, this figure varies between around 1 and 2, depending on how you account for the energy that is created by the left-over corn mash, which is often use as cattle feed. The respected and knowledgeable energy blogger Robert Rapier (who is an open critic of the U.S. biofuels industry) has a very extensive look at how the use of these numbers has changed over time in ways that make the process appear more efficient.

    http://theenergycollective.com/robertrapier/39325/fun-numbers-new-usda-report-corn-ethanol

    Rapier also criticizes corn ethanol on the grounds that half or more than half of the caloric energy in the fuel actually comes from the natural gas that is used to power the boilers.

    Hope I answered your question, no need to stick with food vs fuels if other issues are more interesting for folks.

  4. Kepler

    I am happy you guys talk about this issue. I haven’t seen too much of a discussion on that side of the Ocean.
    I live in Belgium and follow the German news closely. There was a big discussion about using ethanol there and companies were told to offer this “bio” stuff in the tank stations across Germany. And people are not buying it. They just refuse and this has become a political issue. They say either the fuel will hurt their car’s engines – and there are some concerns out there, including some coming from a couple of experts from the car industry itslf- and above all people feel it is absolutely stupid and an environmental disaster.

    They calculated, if I remember well, that EU would need three Belgiums just to produce enough fuel of that kind. That’s just not good. What place are we going to use to cover world need for biofuel?

    Still, these ideas evolve like monsters and then it is so hard to stop them, even if they are just stupid.

    Politicians repeat like parrots what their lobbists have told them to say 2 years earlier and they keep telling that unless people come up in arms or else to protest and put forward newer facts

  5. HalfEmpty

    Hush. Have a sip.
    Perhaps the US will raise the tariff wall higher against imported ethanol. This will make corn syrup even more attractive. Hell it’s win, win for all concerned. We waste corn, Europe wastes time.

  6. Marcus Anonymous

    I have to take factual issue with assertions in both the article and the comments:

    The article asserts: that the Brazilian ethanol industry creates:

    “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.”

    The U.S. ethanol industry creates substantially more ethanol, about 13.5 billion gallons (51.3 billion litres), which I believe is about twice what Brazil produces. Unlike a couple of years ago, the U.S. is now exporting to Brazil (which has a higher tariff) and the U.S. is importing negligible quantities (if any) of ethanol, from Brazil or anywhere else. In fact, the U.S. is now a large net exporter and Brazil’s exports are drying up. Ethanol produced in Brazil and the U.S. have identical energy contents. So it is hard to argue that the Brazil industry is producing more energy.

    U.S. ethanol is probably using more energy (has a lower EROEI), but that too is misleading. Some energy is more valuable than others. Liquid fuel is more valuable than natural gas containing the same amount of energy. The corn liquor business turns less valuable energy into more valuable energy.

    And unlike either Brazilian or U.S. ethanol, the Canadian tar sands industry consumer massive amounts of yucky sludge INSTEAD OF FOOD. (Nobody ever calculates an EROFI: Energy returned on food invested.)

    Furthermore, the assertion on subsidies is very misleading. The U.S. does directly subsidize the use of ethanol (now $0.45/gallon), but it also has mandates (legal requirements to use a minimum amount of ethanol). The U.S. mandates have never had any direct effect because the U.S. has always used more than the minimum anyway (because of the subsidy and recent high prices of gasoline). Mandates are what economists call both an implicit tax (making consumers pay more than they would otherwise have to) and an implicit subsidy (paying producers more than they would normally receive).

    However, in Brazil also has ethanol mandates and in Brazil the mandates do have legal force. You are not allowed to sell gasoline without a minimum amount of ethanol added. So Brazil does have implicit government support, just in a different form.

    In both countries, ethanol policy functions as an agricultural subsidy that keeps crop prices high. Sometimes the ethanol plants are profitable, when crop prices (corn and sugar) are relatively low and ethanol prices are high. Right now, ethanol prices are high and crop prices are higher. In the U.S. many of the plants are getting squeezed. In Brazil, it is my understanding that they favor just producing sugar. It is the farmers (landowners) that are getting rich. U.S. land prices have been climbing steadily ever since the ethanol industry took off. It has made people who inherited farmland wealthier. For them, ethanol is very profitable.

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