Lessons from Brazil: Fuel Choice and Offshore Development
Tyler Priest

 

U.S. energy policy has arrived “at the crossroads,” to paraphrase Vaclav Smil.  We have been here before.  As energy historians have well documented, the basic energy issues we face today were rehearsed in the 1970s (http://www.class.uh.edu/hist/energy2007/conferenceprogram.asp).  Although the United States did manage to engineer successful short-term responses to the energy shocks of that decade, the nation failed to develop a long-term energy policy to diversify supply and demand toward cleaner and more secure sources.

Similar to the 1970s, the foremost challenges today are environmental sustainability and dependence on foreign sources of fossil fuels.  To address these challenges, U.S. energy policy should strive to reduce the fossil fuel content of energy and seek to develop new sources of both fossil fuels and alternatives domestically.  The difficulties and complexities of doing so, however, are formidable.  Rather than list all the historical lessons we should have learned and cite all the innovative solutions now being placed on the table, I want to examine one fundamental problem and examine how one country’s successful response to it shows a way to begin addressing the larger challenges.

The problem is the fossil fuel monopoly in transportation fuels.  Petroleum supplies almost 97 percent of U.S. demand for transportation (and about 80 percent of the world’s demand).  More than 28 percent of our total energy consumption goes for transportation.  Net imports account for 57 percent of U.S. petroleum consumption.  Our mobility, which underpins our entire mode of living, depends on one strategic commodity controlled by the Organization of Petroleum Exporting Countries (OPEC) and its junior partners, the international oil companies. 

Americans need greater fuel security and more transportation options, especially ones that are less polluting.  But these goals are impossible to meet unless the fossil fuel monopoly is broken.  The easiest, cheapest, and most environmentally friendly way to do this is to introduce fuel choice in automobiles, starting with a mandate that all new autos be “flex fuel.”  This will put us on a path to using less petroleum overall, and help pave the way toward more plug-in hybrids and electric vehicles.  Even if we place ourselves on this path, however, fossil fuels will continue to supply a large percentage of our transportation needs.  Therefore, in addition to fuel choice, another national priority should be to obtain more of our petroleum closer to home.  The most promising area to explore for new deposits is along our outer continental shelf. 

One nation the United States can look to for direction is Brazil, whose energy policies developed in the 1970s achieved astounding success.  Despite an abundance of nature resources, Brazil for decades was a country dependent on imported fossil fuels.  Its state-owned oil company, Petrobras, was founded in 1953 behind the nationalistic slogan “o petroleo é nosso” (“the oil is ours”).  As it turned out, the nation did not have any oil, at least in conventional locations.  Brazil’s military governments powered industrial growth and development – the so-called “Brazilian Miracle” of 1968-1972 – with petroleum imports.  The oil shocks of the 1970s, however, magnified inflationary pressures and balance-of-payments crises, thus killing the miracle.  Chastened but determined, Brazil in the mid-1970s launched a long-term program to attain greater energy independence.  The strategy was two-pronged, focusing on domestic oil exploration, which meant looking offshore, and finding domestic substitutes for petroleum, which meant converting sugar cane into fuel alcohol, or ethanol.

Brazil began its “Proálcool” program in 1975 by financing the construction of 170 distilleries in commercial sugarcane areas.  Ten years later, more than three-quarters of the 800,000 cars made in Brazil could run on cane-based ethanol.  However, when sugar prices rose sharply in 1989, mill owners stopped making cane available for processing, preferring to export to international markets.  The ethanol Brazil produced was hydrous ethanol, which could only be used in its pure form, not mixed with gasoline.  As oil prices slumped in the 1990s, Brazil’s dedication to ethanol wavered.  Meanwhile, the development of anhydrous ethanol, which could be combined with gasoline, sparked a new wave of ethanol fuel production and consumption.  In 2003, Volkswagen introduced “flex-fuel” motor vehicles (FFVs) in Brazil at no increase in price above standard vehicles.  Within three years, more than 70 percent of automobiles sold in Brazil were FFVs.  The combination of increasing FFVs on the road and high oil prices encouraged Brazil to expand ethanol production, turning the country into the largest producer and exporter of sugarcane and ethanol in the world.  Although ethanol meets only about 15 percent of Brazil’s demand for transportation fuel, consumers have the option of fueling their autos with ethanol, gasoline, or some combination of the two, at no added cost.  The value of this flexibility was put on display in 2008 during the run up in world oil prices to $148, when gasoline, which was suddenly much more expensive than ethanol, literally became an alternative fuel in Brazil.  The Economist calls Brazil’s ethanol program “Lean, Green, and Not Mean.”

Ethanol cannot completely replace gasoline in Brazil or the United States, and not all kinds of ethanol are commercially viable.  As almost everyone but U.S. agribusiness now agrees, corn-based ethanol produced in the United States is an environmentally and economically losing proposition for the nation.  Brazilian sugarcane produces eight times of much energy in the form of ethanol as American corn, and it takes twice much land to cultivate corn for the same amount of ethanol as Brazil produces from cultivating sugar cane. Yet, the United States maintains a 54-cents/gallon tariff on imported ethanol.  U.S. energy policy should strive to encourage the consumption of fuels from more efficient and sustainable sources, such as sugarcane, switchgrass, and algae, rather than subsidizing the corn-based ethanol industry, which is a “net energy loser,” even if this calls for importing more ethanol.

Becoming more energy independent does not necessarily mean supplying all or even most of our energy consumption from home.  Achieving independence involves breaking petroleum’s monopoly in the transportation sector.  Starting this process does not require radical measures.  For only $100 per car, automakers can build a flex-fuel engine in every car they sell.  Motorists would not have to purchase ethanol, but they would at least have the choice.  With the creation of this market and a commitment to ensuring open fuel standards, service stations would gradually install pumps to supply ethanol, and eventually a more informed consuming public, desiring cheaper and more efficient sources of ethanol, would demand an end to corn ethanol subsidies and the tariff on imported ethanol.  The strongest and most organized advocate of this strategy is the “Set America Free” coalition (http://www.setamericafree.org/coalition.html).  Led largely by neoconservatives who want to minimize U.S. ties to oil-producing Islamic nations, this coalition nevertheless includes people from across the political spectrum and from environmentalist organizations, such as the Natural Resources Defense Council (NRDC), who have other agendas.  By providing an alternative, fuel choice would indeed set America free from complete domination by OPEC and fossil fuels, and it would give motorists an insurance policy against supply disruptions and price spikes.

Fuel choice is a step toward energy conservation and independence, but it will not wean our society from oil.  To the extent that we continue to consume petroleum in transportation, heating, and producing the petrochemicals that go into all the modern materials we take for granted, it would be better if supplies were obtained closer to home.  This is the other area in which Brazil can provide direction.  In 1974, just as Brazil prepared to launch its Proálcool program, Petrobras made the first of many significant discoveries in the Campos Basin off the coast of Rio de Janeiro.  Carefully developing its technical and organizational capabilities through risk and service contracts with foreign oil companies, Petrobras became a world leader in deepwater production technology.  Huge discoveries in recent years has moved Brazil into the elite ranks of world oil producers, and deepwater “pre-salt” discoveries announced in 2008 could turn it into a major exporter on par with OPEC nations.

The United States has long been a leader in offshore oil, but Americans have never made the same kind of national commitment as Brazil.  NIMBY and environmental opposition to offshore oil, which has shut down most of the U.S. coastline, hardly exists in Brazil, because Brazilians appreciate the economic and strategic importance of the nation’s offshore fields.  High rates of production make deepwater oil cheaper than many people think, and although oil and gas in the Gulf of Mexico is still vulnerable to disruption from hurricanes, it is still insulated from all the possible supply disruptions around the world.  I have made a more detailed case elsewhere on the importance of offshore oil to U.S. energy policy (see, for example, http://www.h-net.org/~energy/roundtables/Offshore.html; http://hnn.us/articles/54465.html).  Suffice it to say that drilling off the Atlantic, Florida, and Pacific coasts promises to add significantly to national petroleum supply, at a time when U.S. and the world need every last drop, and it poses less ecological risk than usually advertised.  Both the industry the political advocates of offshore oil can do a better job of articulating the value of this resource to the nation.

For the foreseeable future, hydrocarbons will remain our chief source of energy, and we will probably never achieve complete energy independence.  But by promoting fuel choice and opening up more offshore territory, we can at least assert more control over our energy future as well as make it more sustainable.

Tyler Priest is Director of Global Studies at the University of Houston’s C.T. Bauer College of Business.