U.S. Delegations Pay a Visit
RIO DE JANEIRO, Brazil -- After nearly three decades of
work, Brazil has succeeded where much of the industrialized world has
failed: It has developed a cost-effective alternative to gasoline. Along
with new offshore oil discoveries, that's a big reason Brazil expects to
become energy independent this year.
To see how, take a look at Gildo Ferreira, a
39-year-old real-estate executive, who pulled his VW Fox into a filling
station one recent afternoon. Instead of reaching for the gasoline, he
spent $29 to fill up his car on ethanol made from sugar cane, an option
that's available at 29,000 gas stations from Rio to the Amazon. A
comparable tank of gasoline would have cost him $36. "It's cheaper and
it's made here in Brazil," Mr. Ferreira says of ethanol. If the price of
oil stays at current levels, he can expect to save about $350 a year.
At current prices, Brazil can make ethanol for about $1
a gallon, according to the World Bank. That compares with the
international price of gasoline of about $1.50 a gallon. Even though
ethanol gets less mileage than gasoline, in Brazil it's still cheaper
per mile driven. As a result, ethanol now accounts for as much as 20% of
Brazil's transport fuel market. The country's use of gasoline has
actually declined since the late 1970s. The use of alternative fuels in
the rest of the world is a scant 1%.
Yet countries wanting to follow Brazil's example may be
leery about following its methods. Military and civilian leaders laid
the groundwork by mandating ethanol use and dictating production levels.
They bankrolled technology projects costing billions of dollars, despite
criticism they were wasting money. Brazil ended most government support
for its sugar industry in the late 1990s, forcing sugar producers to
become more efficient and helping lower the cost of ethanol's raw
material. That's something Western countries are loath to do, preferring
to support domestic farmers.
With government support, sugar companies and auto
makers' local units delivered cost-saving breakthroughs. "Flexible fuel"
cars running ethanol, gasoline or a mixture of both, have become a hit.
Car buyers no longer have to worry about fluctuating prices for either
fuel because flex-fuel cars allow them to hedge their bets at the pump.
Seven out of every 10 new cars sold in Brazil are flex-fuel.
Brazil is also fortunate that sugar is the cheapest way
to make ethanol and Brazil has the right conditions for growing the crop
-- plenty of land, rain and cheap labor.
Despite these unique circumstances, Brazil's efforts
are being closely followed by countries with big fuel bills. India and
China have sent a parade of top officials to see Brazil's program.
India, the world's second-biggest sugar producer behind Brazil, mandated
in 2003 that nine of its states add a 5% ethanol mixture to gas. The
Brazilian unit of Germany's Volkswagen AG, the first car maker to
introduce a flex-fuel model in Brazil, has received 38 delegations from
more than a dozen countries in the past year alone, VW officials say.
Brazil says its ethanol exports will likely double to
$1.3 billion in 2010 from $600 million in 2005, largely to Japan and
Sweden. These countries hope using ethanol -- which releases less carbon
dioxide than fossil fuels -- will help them meet their obligations under
the Kyoto Protocol to cut emissions.
The U.S., which currently imports 60% of its oil, is
watching Brazil's progress, too. Three members of the Senate Energy
Committee recently visited, and Sen. Hillary Clinton has cited Brazil as
a role model in cutting dependence on imported oil. When President Bush
made a recent stop-over in Brasilia, Brazilian leader Luiz Inacio Lula
da Silva hosted a barbecue and described to Mr. Bush how the country has
reduced its oil import bill, according to Brazilian officials at the
meeting.
The most recent U.S. energy bill, signed into law in
August, calls for more than doubling ethanol use by 2012. But U.S.
ethanol, which is made from corn, costs at least 30% more than Brazil's
product, in part because the starch in corn must be first turned into
sugar before being distilled into alcohol. It may take the U.S. a few
more decades to bring the cost of ethanol down to 80 cents a gallon --
equivalent to Brazil's most efficient producers -- according to the U.S.
Department of Energy. U.S. trade barriers make Brazilian ethanol and its
sugar expensive to buy.
Using carbohydrates instead of fossil-fuels to run cars
is not a new idea. Henry Ford's first car was made to run on ethanol. So
was the first spark-ignition car engine, developed by German Nicolas
Otto in the second half of the 19th century. During World War II, the
U.S., Brazil and other nations relied on ethanol to extend gasoline
supplies. In the postwar period, however, gasoline was so plentiful and
cheap that ethanol lost its allure.
'Strategic Challenge'
The first oil shock in 1973, sparked by an oil embargo
amid war in the Middle East, rekindled interest. Months after Syrian and
Egyptian tanks rolled into Israeli-held territory, the price of oil
quadrupled. Few places were hit harder than Brazil, which imported 80%
of its fuel at the time. Within months, Brazil's economy slid into
recession. About 40% of its foreign-exchange income was used to import
oil.
"We faced a clear strategic challenge: How would we
develop without oil?" recalls Eduardo Pereira de Carvalho, a finance
ministry official at the time who now heads the São Paulo state
sugar-growers' federation.
In 1975, Brazil's military leader, Gen. Ernesto Geisel,
ordered that the country's gasoline supply be mixed with 10% ethanol, a
level Brazil steadily raised to 25% over the next five years. That meant
the same amount of gasoline would last longer. It also allowed Brazil to
pay for fuel with local currency, in the form of payments to farmers.
To help the nascent industry, the government gave sugar
companies cut-rate loans to build ethanol plants and guaranteed prices
for their product. Sugar companies were delighted with the new market,
which helped when prices were low. The government also funded Urbano
Ernesto Stumpf, an ethanol researcher at a Brazilian Air Force
laboratory, who was developing a car that would run on ethanol alone.
In November 1976, three ethanol-powered cars created by
Mr. Stumpf -- a Beetle, a Dodge and a Brazilian car called a Gurgel --
embarked on a 5,000 mile trip from the air force's research lab in the
southeastern state of São Paulo to the northern city of Manaus in the
heart of the Amazon. The trip, christened "The National Integration
Rally," aimed to demonstrate to Brazilians that ethanol really worked.
When the government ordered state-owned companies to test ethanol
engines in their fleet, the São Paulo state telephone company converted
400 gasoline cars into ethanol ones. They displayed the logo: "Powered
by Alcohol."
After the 1979 Iranian revolution caused the world's
second oil-price shock, Brazil sped up its efforts, initiating what
became known as the Proalcool program. In Brazil, ethanol is called "alcool"
(pronounced OWL-coal).
Brazil's new leader, Gen. Joao Baptista Figueiredo,
ordered sugar companies to ramp up production. He also required
state-run oil giant Petrobras to make the fuel available at filling
stations. Car companies received tax breaks to get ethanol-powered
vehicles into showrooms. By the end of the year, Italian car maker Fiat
SpA was offering an ethanol-only car for sale. Within a year, every
foreign and domestic auto company in Brazil had followed suit.
Big Hit With Consumers
The cars were hard to start on cold mornings because
ethanol burns at a higher temperature than gasoline. Creating a fuel
with 10% ethanol makes little difference to a car's performance, but
anything above that, researchers have found, can cause problems. The
mixture can corrode metal engine parts because of its high water
content, for example.
Nonetheless, the cars were big hits with consumers,
largely because government price supports made the fuel 35% cheaper than
gasoline at the pump. Ethanol also helps acceleration, an advantage in a
country where Formula One racing is a national passion. By 1983, nine
out of every 10 new cars sold in Brazil ran on ethanol alone.
While motorists grew fond of the made-in-Brazil fuel,
there was a cost in the form of hefty government subsidies. Consulting
firm Datagro, which counts Brazil's biggest sugar companies as its
clients, estimates that Brazil spent at least $16 billion in 2005
dollars from 1979 to the mid-1990s on loans to sugar companies and price
supports. The Datagro estimate doesn't include foregone revenue from tax
breaks as well as other costs to consumers.
In 1986, after civilians replaced generals in Brazilian
politics, the world price of oil plunged, endangering the government's
pledge to keep the price of ethanol below that of gasoline. In the
following years, the country was battered by hyperinflation, prompting
the International Monetary Fund and other creditors to urge Brasilia to
rein in spending. In 1989, President Jose Sarney started cutting ethanol
price supports. Sales of ethanol cars plummeted and some Brazilians felt
the entire experiment had been a waste.
But the ethanol market never dried up entirely, thanks
largely to the decades of groundwork. Sugar companies continued to make
the fuel and learned how to cut costs, encouraged by a state requirement
that all gasoline be mixed with ethanol. Gas stations still offered the
fuel, which is taxed at just nine cents a liter compared with about 42
cents a liter for gasoline, according to World Bank estimates.
While other countries were busy mapping the human
genome, Brazilian scientists at the Centro de Tecnologia Canavieira, a
research lab funded by sugar growers, were decoding the DNA of sugar
cane. That helped them select varieties that were more resistant to
drought and pests and yielded more sugar content.
The center is located in the heart of Brazil's sugar
country, about two hours drive from São Paulo. Giant satellite images of
sugar fields help researchers identify which variety will grow best in
which part of the country, where to locate new fields and the best time
to harvest. Over the past 20 years, the center has developed some 140
varieties of sugar, which has helped lower growing costs by more than 1%
a year, according to Jaime Finguerut, the center's director of ethanol
research.
Other improvements include using remains of processed
cane to power sugar and ethanol plants, and using industrial waste from
ethanol production to fertilize sugar fields. As a result, the
productivity of Brazil's ethanol producers has steadily increased. In
1975, Brazil squeezed 2,000 liters, or about 520 gallons, of ethanol
from a hectare, or nearly 2.5 acres, of sugar cane. Today, it's nearly
6,000 liters.
As gasoline prices soared in recent years, ethanol
rebounded. By 2002, its price was again competitive with gasoline and
old ethanol-only cars started recovering their prestige. Last year,
thieves stole an ethanol-only, 1994 Ford Royale, owned by Francisco
Baccaro Nigro, one of the engineers who helped develop ethanol-only
cars. "I'm sure it's because ethanol is cheaper," Mr. Nigro says.
"Thieves know this."
One last step remained. Some consumers were leery of
buying ethanol cars because they weren't convinced the fuel would remain
cheaper than gasoline.
A Cheaper Device
Fernando Damasceno, chief engineer at the Brazilian
unit of Italian car parts company Magneti Marelli, thought the solution
was to create cars that ran on either fuel equally well. Ford Motor
Co. had offered flex-fuel cars in the U.S. since 1991 but the
Brazilians thought its flex-fuel device expensive and cumbersome.
Mr. Damasceno created a cheaper device by programming a
standard car computer to constantly calculate the mixture of ethanol
versus gasoline in the tank and adjust the engine accordingly. In 2002,
the team sold the device to Volkswagen, which introduced its flex-fuel
Gol the next year. Mr. Damasceno's black box is now sold by five major
car makers in Brazil. Even Ford's Brazil unit uses the Damasceno device.
In Ford's newest ad in Brazil, an indecisive young boy
can't decide between a pair of brown and red shoes. As a teenager, he
can't pick between a blonde and a brunette at a party. The ad ends with
the young man pulling up to a gas station in his Ford Ecosport. The
attendant asks: "Alcohol or gasoline?" The man, happy he doesn't have to
choose, raises two fingers, signifying both.
Write to David Luhnow at
david.luhnow@wsj.com1
and Geraldo Samor at
geraldo.samor@wsj.