Dispatches Do Brasil: 40 Years Of Pr-lcool
As I pulled into the gas station last week, I faced a decision. Regular gasoline was on sale for R$3,199 a liter, while ethanol (or “álcool” as we old timers insist on calling it) was R$2,299. That meant the sugarcane derived fuel was 71.8% of the price of gasoline. Bearing in mind that gasoline in Brazil is actually E25 and will soon be E27, the rule of thumb is that if the price of ethanol is 70% that of gasoline, it compensates to pump it in spite of the mileage drop.
I decided to go for it. It was the first time in more than 9 years that I enjoyed the result of a program instituted 40 years ago.
In 1973 the first OPEC embargo hit Brazil with devastating force. Between 1968 and 1973, the country lived its “Milagre Econômico” (Economic Miracle). In those years, GDP growth went from 9.8% a year to 14%. In the next period (1974-1979), growth still existed, but at half the previous levels (6.5% a year on average). Inflation more than doubled. The balance of trade was extremely affected and the government decided to attack importations. As the economic miracle in Brazil had been inspired by CEPAL and its substitution of importations policy, this line of thinking was quite natural. It also made sense to reduce petroleum imports as that was responsible for a little over half the trade deficit.
In this context, the Pró-Álcool program was seen as a solution. Launched by then president Ernesto Geisel in 1975 with “unlimited funding”, it set about looking for a renewable source of fuel. Initially, various vegetable sources were studied. However, sugarcane was soon chosen as the one. This decision had a technical base as sugarcane has one of the highest yields per hectare. Its weakness is that it is a commodity in a highly volatile market, being that sometimes it is better for the grower to sell sugar and not fuel. Being that in the mid 70s sugar was very cheap, a political decision was made to use it as it would benefit the already extensive sugarcane culture and industry chain in Brazil.
The Pró-Álcool program provided subsidies for increased planting, distribution and storage networks. It also showered money at universities and car makers in Brazil so that they could overcome the technical difficulties of running a car on ethanol. Still in debate today, those effects were largely neutered and overcome.
And that constituted the first phase of Pró-Álcool. Technical solutions in motor vehicles and increased production to gradually add and then increase ethanol content in gasoline. This phase was successful and ethanol production grew from 600 million liters a year in 1976 to 3.4 billion in 1980.
The launch of the Fiat 147 “a álcool” marks the next phase of the program. That Fiat was the first mass-produced car run exclusively on ethanol. Launched in 1979, it showed the way and soon the other makers then present in the market (Volkswagen, General Motors and Ford) launched their ethanol enabled engines. In spite of the novelty, the much lower price of ethanol virtually guaranteed that ethanol-powered cars took over the market. By the mid 80s, brand-new, gasoline-powered cars were virtually extinct (alcohol-powered cars went from a participation of just 0.46% in 1979, of 26.8% in 1980, their first full sale year to a peak of 95.8% in 1985).
On the government side, the program was hugely successful. Due to the second OPEC shock in 1979 and the attendant Brazilian balance of trade payments crisis (petroleum once again made up almost 50% of that deficit), runaway inflation and flat growth (the 80s are the lost decade in Brazil), the government showered even more incentives towards the use of ethanol. Production reached 12.3 billion liters a year, beating the official 10 billion liter target.
In 1986, the petroleum counter-shock took place. That year the price of the barrel dropped from around US$30-40, to a level fluctuating between US$12-20. In Brazil that was felt hard from 1988 on. Due to the government loosing its capacity for investments (due to the payments crisis), the availability of ethanol dropped slightly or held steady, while the demand for it increased. The government chose to continue giving incentives to ethanol to keep Pró-Álcool’s credibility. It maintained the price difference between ethanol and gasoline by raising taxes on gasoline. It also paid growers artificially low prices on ethanol and unstimulated exports by placing price controls on sugar exports.
This all resulted in the ethanol supply shock of 1989 and 1990. While production remained relatively stable and sugar exports were indeed curtailed, the continued growth of the fleet caused the system to near its breaking point. During harvest time ethanol was plenty. But during the growth season, stocks were insufficient, resulting in long lines at gasoline stations. Too young to have waited in line during the 70s Arab shock, I did wait, sometimes over an hour, in line, to get my ethanol´powered Fiat Uno’s tank filled. Additional measures were taken such as closing gas stations at night and forbidding them to open on weekends. The effectiveness of such measures has always been contested as people would fill up their tanks to the brim when alcohol was available, buy extra ethanol to keep in gallons at home. I remember traveling with plastic gallons filled with ethanol in the cargo hold of our Volkswagen Quantum station wagon on weekend trips…
All of that crumbled Pró-Álcool’s credibility. From fully embracing the technology, the market shunned it. In spite of government measures, incentives and pressures, car makers also turned their backs on the ethanol-powered car. Engine management systems meanwhile improved and gasoline-powered cars in Brazil slowly got new engines. This made the artificially-instituted, tax-driven price difference between gasoline and ethanol irrelevant. Due to lack of interest, these technologies did not make their way into ethanol engines. So, the market turned.
Prevailing low international petroleum prices also made the government look favorably on gasoline. As such, it again extended incentives to makers. But this time it was to make very low displacement gasoline engines. Thus, the 1.0 L engine was introduced in Brazil (and was so successful it reached a market participation of almost 80% in the late 90s). The crisis in production continued as the government slowly turned off some of the subsidies to the sugarcane industry. During the 90s, Brazil actually had to import ethanol for internal consumption.
After 1995, Pró-Álcool program entered a new phase. Brazil fully deregulated the sugarcane industry. It lived on a true market basis. Sugar exports were freed and from 1 million tons in the regulated market before, Brazil was soon exporting 10 million tons a year. This satisfied sugarcane growers as external prices for sugar were much better than internal ethanol prices. During this phase 1995-2000, roughly 1% of cars sold in Brazil ran solely on ethanol (mainly government purchases to keep growers interest in producing ethanol).
In 2000, we entered a new phase in the Pró-Álcool program. At first, in an effort to regulate the market and avoid wild fluctuations in fuel prices, the government learned to manipulate ethanol content in Brazilian gasoline. From the 70s original level of 18%, it gradually increased, first 22%, then 25% and now 27%.
This gave growers incentive to privately invest in the market. New refineries were built. A technological breakthrough (largely developed by EMPRABA, the government’s agricultural agency) permitted the growth of sugarcane in the “cerrado” (Brazilian savannah) opening up large tracts of land in the Mid-West region of the country to the sugarcane culture. Also state governments moved in on the act as the Federal government adopted a more distant approach to the program. São Paulo state, the richest and most populous in Brazil, stepped in and granted local sugarcane growers incentives and reduced taxes on the fuel in the state. It is a major producer and as such defends its position in this way.
In 2003, Volkswagen do Brasil launched what it touted as the first flex fuel mass produced car in the world, the Gol. Technically, this was simply not true. The first flex fuel or dual fuel vehicle to be mass produced was the Ford T. And though the technology was developed locally, it improved upon a development that also came from the T’s homeland. Due to evermore stringent emission standards in the US (and most especially California), car companies were forced to develop this technology again. Aided by the greater computational power available in engine control systems, blends of ethanol/gasoline became the norm. The consumer hardly notices the difference.
In Brazil flex cars became all the rage. In a few short years they decimated the gasoline-powered car. So much so, that exclusively gasoline cars (that can’t run on E100) are only available in this country as imports. The technology meanwhile has been improving. At first, cars with they system would add an auxiliary tanks (usually in the engine bay) that would have to be filled up with gasoline to aid cold starts should the tank be filled with E100. Presently, some cars are using a system that does way with that by pre-heating the ethanol before fire-up. This is done in milliseconds and is hardly noticeable, and eliminates the need for popping the hood and feeding the gas tank.
Over the years, the Brazilian government has defended the need for the Pró-Álcool program in Brazil citing that it creates technology in the country, stimulates job creation and is a technology that shields us from external shocks (price or supply). Detractors of course abound and point the finger at the high prices of gasoline in Brazil as a consequence of the program. They usually attack the program by means of economic reasoning accusing that it only serves to transfer income from consumers to growers and is not financially feasible unless petroleum prices are very high.
In my personal experience and not living in São Paulo state (where it has been advantageous for most of the flex fuel car era), I have only made use of the flex technology for a couple of years, maybe from 2005 to 2006. Ethanol was more advantageous for most consumers in this country only for a brief period, maybe 2004 to 2006. Nowadays, in the midst of corruption scandals at the state petroleum company Petrobras, a tax reform to make up for lost revenue coming from an economy stagnated by governmental overspending in the last few years and a crisis of credibility, ethanol may be turning into a viable option again. For how long is anybody’s guess, especially in an international scenario where traditional producers are trying to price out shale oil.
As to me I managed to save a couple of cents. My last gasoline tank returned 12 km/l. The current ethanol tank full revealed a 9.1 km/l consumption. A 75.8% return. So I gained about 4%. I’ll be rich soon…
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