Looking South: The world ethanol industry is booming – thanks to the Brazilian example.
By William (Bill) Kovarik
For Com Sciencia magazine, Fall 2006
As Brazilians celebrate their country’s achievements in renewable energy this year, they might also consider how much Brazil’s example has meant to the rest of the world and especially to the United States.
This is the year that Brazil lost its status as an energy buyer on the world market. It is also the year that flexible fueled vehicles saturated the Brazilian car market. And it is the year, according to London’s Financial Times, that Brazilian ethanol became a dominant factor in the world sugar market.
In contrast, the US ethanol industry has struggled for decades to achieve the kind of respectability and success that its counterpart enjoys today in Brazil. Only in 2006, as the cost of oil addiction became increasingly obvious, did the US ethanol industry approach the “tipping point.” With over four billion gallons per year in production, and another four billion gallons of capacity under construction, the US ethanol industry is now booming like never before.
Hard work and even harder lessons pulled the US industry though, but the US industry owes some of its success to the Brazilian example. This is reflected in recent news articles and Congressional testimony:
“For decades, (US) ethanol was considered one of those farm belt boondoggles,” said the Boston Globe newspaper this summer. (The word “boondoggle” implies a bungling government subsidy.) And yet, according to this same article, US ethanol advocates now “have an eye-catching argument [with] a proven success story: Brazil.”
Also, according to a Wall Street Journal article, “Brazil has succeeded where much of the industrialized world has failed” with its ethanol program. And according to the Washington Post, Brazil’s alternative fuel strategy “is seen as a model” for the rest of the world.
In testimony to US Senate Foreign Relations Committee this spring, computer billionaire Visnod Khosla laid out a vision of a transportation system that used ethanol and biodiesel not as “alternatives” but as mainstream fuels. “That might seem implausible, but I hope I can convince you that it’s at least plausible. Brazil went from 4 percent of their new cars being flex-fuel cars to 80 percent in less than three years, all driven by consumer demand.”
Khosla had originally intended to invest in hydrogen and fuel cell technologies, but a visit to Brazil convinced him that biofuels were a practical and immediately available alternative.
Even more than US news clippings and testimonials, the significance of the Brazilian experience for the renewable energy industry of the world is found in the broader historical context. The ethanol industry worldwide has reached a new phase in the struggle for public opinion and technological legitimacy waged for many decades between the deeply entrenched oil industry and its emerging competitors.
As Eduardo Pereira de Carvalho, President of Uniao da Agroindustria Canavieira de Sao Paulo said at a dinner of sugar traders in New York this spring: “What matters is that oil, already, does not reign absolute.”
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Mas o que importa é que o Petróleo já não impera absoluto.” http://www.portalunica.com.br/portalunica/ “Palavara do Presidente”
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The history of world energy domination by the petroleum industry is fairly well known. In most cases, lower gasoline prices and claims that alternatives were “not economical” was sufficient to stifle alternatives. When many governments mandated use of ethanol blends in the 1920s and 30s, the oil industry claimed it was opposed to heavy-handed government interference in private markets. When governments provided tax incentives to ethanol fuels, the oil industry claimed it didn’t want subsidies and preferred to compete on a level playing field.
When economic arguments did not work, technological arguments were employed. In the US during the 1930s, when ethanol became a serious alternative for the first time, the American Petroleum Institute insisted that ethanol blending with gasoline posed insurmountable technical problems.
The API pointed to ethanol blending experiments in the 1920s and said ethanol caused many problems with fuel separation. Rumors of other problems with fuel separation were spread in the Midwest in the late 1930s when 2,000 service stations sold ethanol-gasoline blends.
It’s interesting that problems with ethanol seemed be occurring in the oil-rich countries. In 1949, J.S.W. Pleeth observed in a book, Alcohol: A Fuel For Internal Combustion Engines:
“The bias aroused by the use of alcohol as a motor fuel has produced [research] results in different parts of the world that are incompatible with each other. . . . Countries with considerable oil deposits—such as the U.S—or which control oil deposits of other lands—such as Holland—tend to produce reports antithetical to the use of fuels alternative to petrol; countries with little or no indigenous oil tend to produce favorable reports. The contrast is most marked. One can scarcely avoid the conclusion that the results arrived at are those best suited to the political or economic aims of the country concerned or industry sponsoring the research…”
Not surprisingly, there were no insurmountable problems with ethanol in areas where petroleum was expensive, where alternatives were abundant, or during wartime when fuel was scarce.
Ethanol was well known in Latin America, thanks in part to the extensive use of ethanol blends in France in the 1890s and early 1900s. “France, like others in Western Europe, was a country practically without oil,” wrote Alejandro Muzzolon, a Uruguayan engineer whose 1942 book, “Historia y lucha entre el petroleo, el carburante alcohol y la democracia,” promoted ethanol in Brazil, Uruguay and Argentina as a way to be free of oil dependence and support farmers. “France saw in alcohol fuel a means of independence from the imports of oil,” Muzzolon said.
Muzzolon noted that the original French experiments with ethanol blends were quite successful, and that the creation of a “national fuel” of gasoline and ethanol had been technically challenging but not at all impossible.
Muzzolon also said his life had been threatened by the oil industry for trying to bring the Brazilian ethanol idea to Uruguay, put most of his efforts into promoting an efficient carburetor to make ethanol gasoline blends more economically competitive.
When Brazil contemplated a national fuel program in 1931, a young Brazilian engineer named Eduardo do Sabino de Oliviera expressed confidence that it could be achieved, according to an article in the New York Times. The confidence, he acknowledged years later, came from studying the French model. And it was with this positive attitude that Brazil’s Instituto do Assucar e do Alcool was establshed in 1933 to promote alcohol fuels and lend technical assistance. By 1937 alcohol production reached 7% of the nation’s fuel consumption, about 51.5 million liters.
At the time, Brazil was not unique. Nearly all industrial nations had some kind of tax incentive or mandatory ethanol blending program in place during the 1930s. The idea was to create an emergency fuel system, to support farmers, and to reduce payments for foreign oil. In many nations, the emergency fuel system proved its worth during the war, but afterwards, with the advent of cheap oil from the Middle East, nearly all countries abandoned their ethanol programs.
Only two places in the world continued blending ethanol with gasoline after World War II. One of these was Brazil, where ethanol was seen as a way to deal with surplus sugar. The other was in Great Britain, where the National Distillers company continued to market an ethanol blend called “Cleveland Discoll” until 1968, when the company’s fuels and chemicals division was bought out by British Petroleum.
When the 1973 oil shock occurred, Brazil was the only country left with an ethanol blending program and engineering tests already underway. Urbano Stumpf, then a scientist at the Centro Tecnico Aerospacial (CTA), hosted then-President Ernesto Geisel on a tour of a facility where ethanol vehicles were being tested, and, as the well-known story goes, Geisel was so impressed that he ordered a rapid expansion of the national alcohol program.
At this same time in the US, ethanol as a fuel had been completely forgotten. The response to the 1973 oil shock involved rapid expansion of the nuclear power industry and a coal-based synthetic fuel program. Both were so expensive that they depended on oil prices approaching $100 a barrel, and when oil prices fell again, in the mid-1970s, the so-called “traditional” alternatives stalled out.
Meanwhile, US farmers re-discovered their history and insisted that Congress and the energy department research and develop ethanol from corn. But the idea met strong resistance from the oil and automotive industries. General Motors said ethanol blends produced unacceptable swelling in carburetor gaskets. Chevron oil company engineers said that cold starting, vapor lock, phase separation, surging, hesitation on the freeway, and a host of other problems would be commonplace if ten percent ethanol blends were allowed onto the US market.
Deputy Secretary of Energy John O’Leary summed it up in 1979 by saying: “We have coal, we have nuclear power, and we have gas, and that’s it… There is no place for solar in this century.” Ethanol, he said, was “the new laetril,” comparing it to a fraudulent but fervently desired cure for cancer.
Only a few people understood the deceptive nature of the technical reports from the big oil and auto companies and the outright prejudice of the energy department. They included handful of public servants in Washington and a small commission on alternative uses for corn created in the Midwestern state of Nebraska. They insisted on hearings about ethanol and, in 1978 and 1979, a few of these public hearings took place.
The oil industry used every possible device, and the full weight of scientific authority, to magnify the prejudice against ethanol. Even though it was a transparent attempt to protect their markets, their opponents were weak and disorganized, and it appeared that they would win the argument. But there was one problem: Brazil.
“Automotive companies were denouncing the idea of promoting biofuels on the grounds that they couldn’t be taken seriously,” said Scott Sklar, then an aide to Sen. Jacob Javits and today a renewable energy expert with the Stella Group.
“Brazil’s move to subsidize their vast sugar industry and work with automotive engineers to make ethanol tolerant cars created immense tension in Washington,” Sklar said.
“Biofuels advocates were able to point to the ‘Brazilian experience’ every time the US oil and auto industry said that it couldn’t be done or that it would never be successful.”
Curiosity over this “forbidden fuel” led to hundreds of experiments with 10 percent blends in the US. Most of these took place on a state or a company-wide level, for example, in fleets of phone company vehicles. None of the experiments with what was then called “gasohol” took place on the scale, or with the authority, that compared with the Brazilian experience. It is one thing for a few researchers to say that anticipated problems did not materialize. It is quite another for an entire country to experience it.
In 1980, with only a few months left before conservative Republicans took office, President Jimmy Carter created a fledgling US ethanol program with two laws: First, he signed a bill giving a 5.4 cent tax credit for a gallon of gasoline with 10 percent ethanol. This, in effect, was the birth of the corn-based fuel ethanol industry. Then he specifically excluded imported ethanol from the tax credit. This infuriated Brazilian and Caribbean ethanol producers, but it protected the US ethanol industry at a time when most of the producers were starting small companies.
Once the industry got on its feet, however, the subsidy was often described as “corporate welfare,” and one politically connected company pushed most competition out of the way, dominating the US industry for 20 years. Officials with that company, Archer Daniels Midland, were convicted of price-fixing schemes in the late 1990s.
The ADM scandals helped further diminish the reputation of ethanol in the US during the 1980s and 90s. Consumers frequently saw fuel pumps with signs advertising “no ethanol in our gasoline.” The signs were usually good for a 15 to 20 percent increase in local sales, as consumers responded to rumors and fear. The US government did not help, and officials during the Reagan and Bush years refused to tell consumers that without ethanol, octane boosters in gasoline included more carcinogens like benzene and MTBE.
It was pure coincidence that at the same moment, the ethanol industry faced political problems in Brazil. Subsidies that were crucial to the initial creation of the ethanol industry were withdrawn, and ethanol car sales decreased dramatically. Around the same time, Brazil experienced a revival of the democratic political process. The two events were often seen from overseas as proof that only heavy-handed government intervention could make ethanol work. And it seemed as if the ethanol industries of the US and Brazil had the same basic problem – an inability to compete without subsidies.
Yet from another perspective, the international oil industry had its own network of hidden subsidies, tax breaks and military alliances. At the very least, by the late 20th century, world energy markets had become politicized, and within a certain latitude, the benefits or drawbacks of one energy choice over another simply depended on the initial assumptions and the values assigned to factors like national employment, the environment and public health.
The oil industry remains determined to protect its subsidies and markets. Many US ethanol industry leaders say they expect oil prices to drop dramatically in 2007 in an attempt to deliberately destabilize markets for alternative fuels. Many are actively pushing for a “floor tax” on oil that would keep them in business no matter how low the world price of oil falls.
Mandatory fuel blends, on the Brazilian model, are enforced in seven US states out of the 50 states. One of these, Minnesota, requires that all gasoline have 20 percent ethanol within seven years, while the rest require at most a 10 percent blend. Another 24 states have tax incentives for ethanol.
(NOTE: See map http://www.pewclimate.org/what_s_being_done/in_the_states/map_ethanol.cfm )
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Politics played an important role in the expansion of the US ethanol industry in the 1990s from about one billion gallons a year to about four billion.
First, environmental issues were crucial. Most significantly, the Clean Air Act, applied in 1994, required that ethanol blends be used in big cities that had air pollution problems. Also, the main alternative octane booster, MTBE, was banned in many states as a water pollution hazard in the late 1990s.
Secondly, in recent months Americans have learned of the surprising existence of five million flexible fueled vehicles already on their roads. Most flex car owners had no idea they owned a car that could run on either gasoline or a blend of pure ethanol and 15 percent gasoline called E85. (In the US, with frigid conditions, a blend of 85 percent ethanol and 15 percent gasoline is preferred to help with cold starting). And most flex car owners have no idea how to find an E85 pump.
The five million flex cars are there because an exception in a 1975 fuel efficiency law gave US automakers credit for producing cars that could run on both gasoline and high percentages of alternative fuels. The credit amounted to about two thirds more theoretical fuel efficiency than the car’s actual fuel efficiency. It allowed automakers to more easily meet the requirements and continue selling highly profitable gas-guzzling sport utility vehicles (SUVs).
Although they might have been useful in a national fuel emergency, flex cars did serve a purely political purpose. They were not saving oil, as the original 1975 efficiency law intended. But the cars had the possibility of using alternative fuels because the oil industry had not supplied the alternative fuel pumps.
Since there are only 800 or so E85 pumps out of 176,000 fuel pumps in the entire United States, nearly all of the five million flex cars will have gone through their entire life cycle without fueling up on ethanol or any other alternative fuel.
According to an analysis by the Union for Concerned Scientists, flex car credits have offset fuel efficiency requirements that would have reduced U.S. gasoline consumption by about 1 percent, or 1.2 billion gallons.
The standard flex car uses about 25 percent more ethanol than gasoline, according to General Motors, but Consumer Reports tests show this can be as high as 40 percent more.
Efficiency suffers in the current fleet of flex cars because their design is a compromise. Flex cars have adjustable carburetors for greater ethanol volume but, until recently, there was no cost effective way to create adjustable compression engines. As a result, flex cars did not take advantage of the higher octane power of ethanol.
How, then, would a flex car be acceptable to consumers? Would ethanol have to cost 25% less to make up the difference? And who would take the enormous risk of marketing and promoting such cars?
In effect, US automakers left it up to Brazil to find the way.
As it turns out, motorists in every country feel a certain anxiety about the future of fuel supplies. The idea of having a choice is important to consumers.
In late August, 2006, NBC television broadcast a story in the US that described why flex technology attained a near-total saturation of the Brazilian auto market in such a short time. Ethanol has a price advantage over gasoline, the story said. But even if gasoline prices fall, buyers will want flex cars in the future “because they get a viable fuel choice they never had before.”
NBC also quoted one auto industry observer, Joao Leite, owner of the Autoinforme Web site. “If gas and alcohol are the same price, I’m still going to go for the flex because you never know what will happen in a year or two,” he said. “You can’t lose with a flex car.”
Between the mid-1990s and the fall of 2005, US automakers did not provide consumers with a conscious choice. They did not advertise the flex cars they sold. Few people even knew they existed outside of Brazil. However, both Ford and GM faced possible bankruptcy last year, and desperate times sometimes call for desperate measures. What the US auto companies found was that US consumers were just as interested in flexible fueled cars as Brazilians.
The problem is now is the lack of fuel pumps. This spring, presidents of the three major US automakers asked Congress to give incentives to the oil industry for pure ethanol or E-85 fuel pumps. Most of these 800 fuel pumps are now only available in independent gasoline stations. Major oil companies have yet to embrace the vision of an alternative fueled future, and thus the incentive idea may go nowhere.
Yet the US auto industry has chosen its course and is actively promoting independent fueling stations to its flex car consumers. Ford, GM and Chrysler will also double US flex car production capacity by 2010 to at least two million units per year.
“In the auto industry, a three year time frame is incredibly fast,” said GM vice president Keith Cole. “We are looking across our vehicle line at how much we can push flex technology,” he said.
And, he might have added, US automakers are looking south, at Brazil, with more respect than ever.