The Ethanol Diplomacy Hoax

(International Relations and Security Network, 06/03/2007)


US President George W Bush will meet Brazilian President Luiz Inacio "Lula" da Silva on 9 March to address a long list of talking points, at the top of which is the future of ethanol as an international market commodity.


Lula's message will be a pragmatic one that will target the current duty levied on Brazilian ethanol imports, currently at US$0.54 a gallon. He will ask Bush how the US can be serious about working with Brazil if it continues to protect the US market from Brazilian ethanol.


Bush's agenda is to hear out his Brazilian counterpart, but the US president has little power to change the import tax, which has been extended to 2009.


Friday's meeting is a feel good reunion to promote US-Brazilian relations, but close cooperation between the current US and Brazilian administrations on promoting ethanol as an international commodity is still more of a hoax than reality.


The reality is that the US is focused on meeting its growing ethanol demand with internal producers while Brazil seeks to find international markets beyond the US for its increasing ethanol production.


Bush has called for a five-fold increase in the use of biofuels in the US to cut fossil fuel consumption by 20 percent, a consumption increase of 35 billion gallons of biofuel, essentially ethanol, by 2017.


Some in the US argue they would rather see the US dependent on Brazil for ethanol than on Venezuela for oil. Others disagree, saying the US should work toward energy independence, focusing on reducing the need for fossil fuels and then producing as much ethanol as possible.


Either way, the US will not be able to meet its own growing demand unless it imports ethanol or invests heavily in ethanol feedstock technology.


Collin Peterson, the Democratic chairman of the US House of Representatives' Agriculture Committee, has suggested that the US government should budget US$6 billion for the development of ethanol produced from cellulose rather than sugar.


Peterson's counterpart in the US Senate, Republican Chuck Grassley, has confronted Bush directly. In a 6 December letter Grassley wrote to Bush: "I'm calling for you and your [a]dministration to unequivocally reject any proposals to reduce or repeal the ethanol […] import tariff."


In his letter, Grassley argued that the tariff should stay in place, pointing out that the US currently operates 109 ethanol factories with the capacity to produce 5.2 billion gallons every year. "Now is absolutely the wrong time to consider or propose removing or modifying the existing incentives for the renewable fuels industry," Grassley wrote.


Brazil, however, uses sugar cane to produce cheaper ethanol, a price point better suited for US consumers and for creating an international ethanol market.


Using sugar cane to produce ethanol costs US$0.22 to produce a liter. Using corn is US$0.08 more expensive, and the increased demand ethanol production places on US corn supply has pushed corn futures prices to 10-year highs.


Despite such unintended outcomes, the US will retain the tariff on ethanol imports and use corn well into the future and well past the end of Bush's second term.


It is lamentable that Brazilian access to the US market will remain limited for the foreseeable future. Limited access translates into limited interaction, which ultimately is bad for a future where the US and Brazil work together to promote an international ethanol market.


Brazil, however, is preparing to forge ahead, alone if necessary.


Brazil has attracted US$12.2 billion to build 77 new ethanol plants over the next five years. Another US$2.4 billion will be invested to upgrade existing ones. By 2012, Brazil will have 412 ethanol refineries producing an annual output of 9.5 billion gallons of ethanol, according to the Economist weekly magazine.


Brazilian state-run oil firm Petrobras has also shown considerable leadership demonstrating how fossil fuel companies can and should support a future of alternative fuels. Already Petrobras has entered into an agreement with the Japanese to explore the feasibility of a pipeline that would help transport Brazilian ethanol to Japan via a port on the Pacific. It is possible other Asian states will show interest soon.


The US is focused on protecting its farmers while raising funds to figure out how it will meet a future of sharply increased ethanol demand. At the same time, Brazil is focused on developing the international markets to absorb its sharp increase in ethanol production.


Looking at the real focus of the US and of Brazil, it seems that Bush's trip and so-called "ethanol diplomacy" is more of a hoax than a reality. Media across the Americas suggests that the US president is genuinely interested in an international ethanol market. But Brazil, not the US, is focused on stimulating an international ethanol market. In the end, Bush cannot make promises, so his meeting with Lula will likely be cordial but little, if anything, will come of it.