Brazil Has Energy Right, Right?

One of the things which I read frequently with regard to any number of different centrally-planned government initiatives is something along the line of “well, they didn’t do it right last time, but we know what we are doing and this time it will work.” In other words, the last experts who worked on this failed, but our experts are the real thing.

Which brings me to Brazilian ethanol. Surely these guys and gals are getting it right, right? Massive exporter of ethanol. Cheaper process since they don’t have to convert the corn to sugar first (they already have the sucrose). Been doing it for almost 40 years, etc.

If one reads the Wikipedia article on “Ethanol fuel in Brazil” it would seem that they have gotten things about as right as is possible. Then, if one reads things a bit more closely, one begins to see the contradictions. Here’s one example:

Since 2005, ethanol prices have been very competitive without subsidies, even with gasoline prices kept constant in local currency since mid-2005, at a time when oil was just approaching USD 60 a barrel. However, Brazilian gasoline taxes are high, around 54%, while ethanol fuel taxes are lower and vary between 12% to 30%, depending of the state. As of October 2008 the average price of E25 gasoline was $4.39 per gallon while the average price for ethanol was USD 2.69 per gallon. This differential in taxation favors ethanol fuel consumption, and by the end of July 2008, when oil prices were close to its latest peak and the Brazilian real exchange rate to the US dollar was close to its most recent minimum, the average gasoline retail price at the pump in Brazil reached USD 6.00 per gallon. The price ratio between gasoline and ethanol fuel has been well above 30% during this period for most states, except during low sugar cane supply between harvests and for states located far away from the ethanol production centers. According to Brazilian producers, ethanol can remain competitive if the price of oil does not fall below USD 30 a barrel.

So, “ethanol prices have been competitive without subsidies” since 2005. This would seem to mean that they were not competitive without them before that time–some 25+ years since the industry got fired up in Brazil.

Then there is the 54% tax on gasoline vs a 12%-30% tax on ethanol. Excuse me? How is that not a subsidy? Not to the producers and farmers, but most assuredly to the consumers. In the example given, there was a $1.7 differential per gallon. Put another way, ethanol was 39% cheaper per gallon than gasoline.

Given all of this, we understand now how “ethanol can remain competitive if the price of oil does not fall below USD 30 a barrel.” It can remain competitive because ethanol is currently receiving massive subsidies in the form of instant savings at the pump.

As the American Thinker puts it:

Brazilian ethanol has been a nightmare of impracticality. Production began in the 1970’s as a response to the Arab oil embargo and to use only surplus sugar. Over the years, the Brazilian ethanol program morphed into a national energy policy. In order to “support” their expanding ethanol market and to make up for ethanol’s fuel efficiency deficit, Brazil mandated flex-fuel vehicles and taxed ethanol at a rate less than gasoline (America taxes ethanol motor fuel content at the same rate as gasoline). Early on, Brazil mandated a 20-percent ethanol fuel mix for gasoline. Today, many vehicles in Brazil use mostly or only ethanol fuel. Brazil also nationalized their oil industry and generously and expensively subsidized ethanol production.

Surely, such massive government intervention in at least two markets would be sufficient to insure the success of ethanol.

It wasn’t.

Since their ethanol program was conceived and implemented, Brazil has begun to aggressively develop newly-discovered offshore petroleum reserves. Petroleum development would be unnecessary if the Brazilian ethanol experiment had been successful.

Before it is too late, let’s admit that an energy policy which includes ethanol is not based on anything more than a wish which has not been realized in many decades of research, development and improvements.

If the equation fails to balance every single time it is worked, then perhaps the equation itself is flawed.