Brazil’s Energy Plan Examined

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Brazil’s Energy Plan Examined

By D. Sean Shurtleff, New York Times
May 7, 2008

With national security on everyone’s mind and the average retail price of gasoline nearing an inflation-adjusted high of $3.40 a gallon, analysts have touted Brazil as an example the United States should follow on the path to “energy independence.”

Unfortunately, the analysts and the public they mislead seem to misunderstand both the substantial differences between energy markets in the United States and Brazil and the underlying reason for Brazil’s success. On the latter point, Brazil’s success is often attributed to its thriving ethanol market, but this is at most only a small part of the story.

Indeed, the untold story is more complicated and the one lesson Brazil could teach the U.S. – to increase its domestic oil production – flies in the face of demands made by environmental lobbyists on the Democratically controlled Congress.

In 2006, according to the Energy Information Administration (EIA), ethanol made up about 48 percent of the fuel used by gasoline-powered passenger vehicles in Brazil, but when considering both gasoline and diesel-powered vehicles, ethanol supplied only 20 percent of the total fuel consumed by automobiles and trucks on Brazilian highways.

Though in absolute terms the United States now produces more total ethanol than Brazil, as a share of transportation fuel – less than 3 percent of the fuel used in cars and trucks – we still lag far behind our southern neighbor.

And it is unlikely, absent imposing a huge price increase on drivers and doing horrific damage to the environment, we can ever reach a goal of ethanol providing 20 percent of our fuel supply. Why?

First, Brazil uses much less gasoline and diesel than the U.S. While Brazil consumes 20 billion gallons of ethanol, gasoline and diesel combined each year, of which 4 billion is ethanol, the United States uses 182 billion gallons a year – more than ninefold as much.

To put this in further perspective, for ethanol to displace just 20 percent of current automobile fuel in the U.S. we would have to produce almost double the total amount of fuel Brazilian vehicles use in a single year or almost triple the entire world’s production of ethanol in 2006.

Second, Brazil has a major comparative advantage over the United States in producing ethanol. Its climate is suited to growing sugar cane, which requires half as much land as corn per gallon of ethanol produced. Also, sugar cane-based ethanol provides 8 times or 800 percent more energy than the fossil fuel used to make it, while America’s corn-derived ethanol by the most generous calculations provides only 30 percent more energy than is used to produce it. Further, production costs in Brazil are far lower than in the United States because labor is cheaper and Brazil’s ethanol infrastructure is more developed.

While Brazil’s embrace of ethanol doesn’t have much to teach the United States, its policies regarding domestic oil and gas production do provide an instructive lesson, if only Congress would listen. In the 1980s, despite huge subsidies Brazil began experiencing ethanol shortages, learning firsthand that ethanol production alone would not lead to energy independence.

As a result, it started promoting policies to boost domestic oil production. Indeed, increased production and new oil discoveries played the biggest role in liberating Brazil from dependence on foreign energy.

Brazil increased domestic crude oil production an average of more than 9 percent a year from 1980 to 2005, to 1.6 million barrels of oil per day. Most notably, in 2007, Brazil announced a huge oil discovery off its coast that could increase its 14.4 billion barrels of oil reserves by 5 billion to 8 billion barrels, or 40 percent.

By contrast, from 1980 to 2005, U.S. crude oil production fell an average of about 2 percent a year or 40 percent overall, from 8.6 million barrels of oil per day to 5.2 million.

This is one lesson we could learn from Brazil’s push for energy independence: make oil production a priority. And the United States has significant reserves: the government estimates Alaska and the Outer Continental Shelf could contain more than 100 billion barrels of oil combined – more than 4 times as much as current U.S. reserves.

New domestic oil production will do far more to alleviate America’s dependence on foreign oil supplies than even the most efficient production of ethanol. Tapping this oil only requires Congress to remove legislative barriers to domestic production – no subsidies, no mandates.

Brazil has been sending a message concerning energy since the 1980s, but apparently Washington has selective hearing.

D. Sean Shurtleff is a graduate student fellow and H. Sterling Burnett is a senior fellow with the National Center for Policy Analysis.

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