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The Secret of Viable Ethanol

Wednesday, January 31, 2007

America’s subsidy-dependent ethanol farmers may not like it, but a recent U.S. pact with Brazil could pave the way to an efficient global market in biofuels—and that could change the game.

Sometimes a news item of enormous long-range importance misses the headlines. One such is an item which appeared in the Buenos Aires flagship daily La Nacion on January 26, reporting that the United States and Brazil have just reached an agreement to explore the possibility of greater production and commercialization of bio-combustibles. These are energy sources derived from agricultural products, typically corn or sugar. The end product is ethanol, which when converted to E-85 fuel, makes it possible for automobiles or trucks (once slightly modified technologically) to reduce their dependence on fossil fuels by 85 percent.

This is no pipe dream. Brazil set about encouraging the production of ethanol some years ago. Based on sugar, which it is uniquely positioned to produce in large quantities since its long north-south axis allows it to harvest two crops a year, ethanol now provides 18 percent of the country’s automotive fuel. Once hostile to the vagaries of international petroleum prices, Brazil is no longer a significant importer of foreign oil. While there is an equivalent U.S. ethanol industry, it produces a mere four billion gallons a year—a speck on the screen compared to the 140 billion gallons of gasoline Americans annually consume.

The only obstacle to our getting Brazilian ethanol is a 54 cent per gallon tax on imported ethanol, designed to protect a U.S. industry which is in no position to provision our own market.
Brazil expects its net exports of ethanol to grow to seven billion gallons a year by 2010, a number that might allow us to double our ethanol intake. Ethanol cannot be pipelined, but it can be transported by sea in big tankers, like oil. The U.S. east coast would be a particularly good venue to receive Brazilian ethanol because to get it from the Midwest, east coast customers must pay the significant transport costs associated with crossing the Rocky Mountains. The only obstacle is the tariff.

The only obstacle to our getting Brazilian ethanol is a 54 cent per gallon tax on imported ethanol, designed to protect a U.S. industry which is in no position to provision our own market (and probably will not be for some years to come, if ever).

The agreement reported in the Argentine press is significant for a number of reasons. If carried to its logical conclusion—a lifting of the tariffit could well reverse a half-century of geopolitical alignments. For more than fifty years Brazil has regarded itself as a rival pole to U.S. influence in Latin America and at international meetings; an alliance of mutual convenience on something as crucial as energy could well expand to other areas where the two countries have long been at odds. It could also, by encouraging global free trade in ethanol, create incentives for farmers around the world to produce for U.S. markets.

As reported in La Nacion, the agreement signed between the United States and Brazil will include Colombia and Peru as well as El Salvador, Guatemala, Honduras, Haiti, and the Dominican Republic. Argentina is not included, reportedly because its ethanol industry is in its infancy. Even so, it benefits from robust prices for corn, one of its major exports, and its technical sophistication is such that once the project gets underway it will be able to join in without delay. If some of our traditional suppliers of imported oil aren’t worried about these developments, they certainly should be.

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