Considering Brazil’s Energy Independence

September 2006
By Jaclyn Fichera, Research Associate, and Jeff Kueter, President

The recent increase in oil prices has focused great attention on Brazil’s progress
towards energy independence and has led many to question why the United States
cannot achieve the same result. The Washington Post, for example, ran a front-page
story touting Brazil as a model for the “road to energy independence.”1 Brazilian
President Lula de Silva already declared independence in April of this year.2
The progress toward energy independence in Brazil comes from a combination of
oil and ethanol production, with increased oil production playing the dominant role.
The expansion of Brazil’s domestic oil resources has led to the expectation that it will
become a net oil exporter by the end of 2006, firmly establishing independence from
foreign imports.3 Brazil’s use of sugarcane-based ethanol, however, also contributes
to its energy achievements. Many proponents of ethanol-based fuels attribute these
accomplishments solely to ethanol, now a 30-year old industry in Brazil. Having
matured since the advent of flex-fuel vehicles in 2003, the ethanol industry indeed
adds to, but in no way dominates, Brazil’s energy progress. Before looking toward
Brazil as a model for energy independence, it is necessary to review the reality of the
roles of ethanol and oil in the Brazilian energy system.

Development of Brazil’s Ethanol Program

The oil price shocks of the 1970s led the Brazilian government to address the strain
high prices were placing on its fragile economy. Brazil, the largest and most populous
country in South America, was importing 80% of its oil and 40% of its foreign-
exchange was used to pay for that imported oil.4
In 1975, General Ernesto Geisel, then-president of Brazil, ordered the country’s
gasoline supply mixed with 10% ethanol.5 The level was raised to 25% over the next
five years, which was intended to maintain a constant Brazilian gasoline supply for
an ever-increasing demand. The government assisted the shift by giving sugar
companies subsidized loans to build ethanol plants, as well as guaranteeing prices for
their ethanol products. Already the world’s biggest producer and exporter of sugar,
farmers reaped the benefits of this new demand.
The 1979 Iranian crisis and related oil price shock accelerated Brazil’s conver-
sion of its gasoline supply and automobile fleet. Under the Proalcool Program,
sugar companies were ordered to increase production and the state-run oil company,
Petrobras, was re- Figure 1: Hydrous Ethanol
quired to make álcool
(ethanol) available at
its fuel stations. The
growth in hydrous
ethanol, which uses
a blend of 94-95%
ethanol to 5-6% water,6
rapidly increased dur-
ing the 1980s, with
consumption peaking
in 1989, as shown in *1 million cubic meters is equivalent to 6.3 million barrels of oil equivalent.
Figure 1.7 Source: Brazilian Ministry of Mining and Energy, Brazilian Energy Balance, 2005.

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The views expressed by the author are solely those of the author and may not represent those of any institution with which he is affiliated.

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 Automobile manufacturers were given tax
breaks to produce cars that ran on hydrous
ethanol, and, by 1980, every automobile
company in Brazil was following this lead. By
the mid-1980s, three quarters of the cars
manufactured in Brazil were capable of running
on sugarcane-based hydrous ethanol.8
However, the drop in oil prices throughout
the 1980s and 1990s made it uneconomic
for the Brazilian government to continue
its ethanol program.9 Both production and
consumption of ethanol were basically flat for
much of the mid-1980s to the mid-1990s. After
1995, both production and consumption of
hydrous ethanol began falling quickly.10 The
Brazilian government’s dedication to the
ethanol industry declined and incentives given
by the government wore off, causing hydrous
ethanol fueled vehicle production to decline in
the late 1980s to early 1990s. As oil prices
decreased in the 1990s, the consumer accept-
ance of hydrous ethanol fueled cars greatly
decreased and purchases of gasoline fueled
automobiles returned to previous levels.
The production and consumption of hydrous
ethanol fuel follows an expected pattern.
Figure 2: Brazil Domestic Wholesale of Cars by Fuel Type*
100
90
80
70
Share in
Percentage 60
of Total Sales
50
40
30
20
10
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Year
*Before the introduction of the flex-fuel car in Brazil, cars running on ethanol fuel were primarily using pure ethanol or
hydrous ethanol blends.
2 Marshall Institute Policy Outlook
The second wave of ethanol fuel production
and consumption in the Brazilian market began
in the 1990s when the use of anhydrous
ethanol started to rise. Anhydrous ethanol is a
type of fuel which is more easily combined with
gasoline for automobile fuel. As seen in Figure
3, consumption of anhydrous ethanol has grown
steadily since the 1990s, peaking in 2003.11
Ethanol or Gasoline?
The start of the new millennium brought
with it increased oil prices, which in turn
sparked a resurgence of Brazil’s drive toward
energy independence, including a revival of its
ethanol program. Although it previously used
a hydrous ethanol blend, Brazil shifted toward
the aforementioned anhydrous ethanol, which
is used in a ratio of ethanol to gasoline of 20-
24:80-76.12
Brazil introduced its current generation of
ethanol-powered cars in 2003, the same year in
which anhydrous ethanol consumption peaked.
Named flex-fuel vehicles (FFVs), these auto-
mobiles run on gasoline, ethanol, or any blend
of the two.13 When the car is filled at the pump,
an internal system analyses the mix of the two
Gasoline
Ethanol
Diesel
Flex Fuel
Figure 3: Anhydrous Ethanol
*1 million cubic meters is equivalent to 6.3 million barrels of oil equivalent.
Source: Brazilian Ministry of Mining and Energy, Brazilian Energy Balance, 2005.
fuel types and adjusts accordingly. The first
such vehicles were introduced by Volkswagen
in 2003,14 and by 2004, they accounted for
more than 17% of the Brazilian auto market. In
2005, their sales increased even further,
accounting for approximately 54% of all new
car sales.15
The combination of high sales of flex-fuel
vehicles and high oil prices further caused
Brazil to increase its ethanol production to
accommodate an anticipated auto industry
demand. In 2005, it produced approximately
285,000 barrels of ethanol per day, an increase
from the approximate 200,000 barrels per day
in 2002. In 2005, 102 million barrels of ethanol
were produced, of which 84 million barrels
of ethanol were consumed.16 The surplus is
exported, making Brazil the world’s largest
ethanol supplier.17
Figure 4: 2005 Ethanol Balance*
Production
Barrels Per Day 280,00018
Barrels Per Year 102,200,000
Liters Per Year 16,249,800,000
*A barrel to liter ratio of 1:159 was used for calculation, as referenced on the Petrobras
website.
September 2006
Yet even with this positive balance of trade
and production, ethanol accounted for only
13.6% of Brazil’s total transportation fuel
consumption in 2005.20 The consumption of 84
million barrels of ethanol was 13.6% of total oil
equivalent consumption of 620 million per year.
536 million barrels of other fuels, including
gasoline and diesel fuel, were consumed. The
remaining 86% of Brazil’s transportation fuel
demand is met by petroleum, and increasingly
that petroleum is coming from domestic
Brazilian sources. Exemplifying the importance
of domestic oil production and exploration, the
very declaration of Brazil’s energy indepen-
dence came during the inauguration of a new
oil platform that is claimed to create higher
domestic oil production than consumption for
the first time in Brazil’s history.21
Consumption
231,041
84,330,000
13,410,000,00019
3
Figure 5: World Supply of Ethanol by Country and Percent of Transportation Fuel Demand Met by Ethanol

Source: Energy Information Administration, 2003 and Renewable Fuels Association, 2005.

Increased Oil Production and
Petrobras Control
Brazil’s geology is well endowed with oil
reserves. The majority of Brazil’s oil reserves
are located in the Campos and Santos Basins,
offshore areas near the southeast coast. Since
1980, the country’s oil production has grown
by approximately 9% per year and the Brazilian
government resolutely supports its goal of
making Brazil a net exporter of oil in years
to come.22
Brazil is growing closer to achieving this
goal as its imports decrease every year. The
actions of Petrobras, the state-owned company
that maintained a monopoly on oil activities
until 1997 when the government opened up the
oil industry to competition, reveal how Brazil
has gone about progressing toward its goal.
Petrobras still controls 95% of oil production in
Brazil and is putting forth serious efforts to
achieve Brazil’s oil independence.23
The majority of Petrobras’ oil production
occurs in Rio de Janeiro, in addition to offshore
locations. In 2004, production was also
expanded to three new fields in Marlim Sul,
Barracuda, and Caratinga.24 Current oil produc-
tion remains high, with steady increases every
month. Between April 2005 and April 2006,
Petrobras increased its production by 5.4%,
reaching a monthly record of 1.95 million bpd.
It is able to sustain that record production
because of “the increased operation efficiency
in the local platforms in the coastal states of
Rio de Janeiro and Espíritu Santo and in
mature land areas.”25 The state-owned giant
is also increasing the development of new
natural gas fields to decrease dependency on
foreign imports, particularly those coming
from Bolivia.26
Other than breaking its monthly record
in April, Petrobras began operations with its
new P-50 platform in Ceunca de Campos and
also in the Atlantic Ocean.27 The P-50 plat-
form makes it possible to extract oil locked in
sediments under the seabed in extremely deep
water, technology that will take Brazil closer to
its goal of energy independence.28
Petrobras’s economic goals provide a guide
to Brazil’s expansion of its domestic oil pro-
duction and energy independence. In particular,
on July 3, 2006, the company approved a
business plan that earmarked $87.1 billion in

4 Marshall Institute Policy Outlook

Figure 6
Source: Energy Information Administration, International Energy Annual, Short Term Energy Outlook.
investments for 2007-2011, up 66% from the
$52.4 billion provided for in the prior plan.
Approximately 85% of spending in the new
business plan is directed toward exploration
and production within Brazil, thereby adding to
its self-sufficiency. The new plan set a long-
term oil and gas production target of 4.56
million bpd, a goal that was set to reach 3.49
million bpd by 2011. Of the 2011 total,
568,000 bpd are to be produced internally.29
The combination of Petrobras’ dramatically
increased investment and the expansion of
exploration, sources, and production has
significantly contributed to Brazil’s goal of
energy independence. Based upon EIA data
and assertions coming from the Brazilian
government, oil production and exploration,
especially that accomplished by Petrobras, is
largely responsible for the cessation of Brazil’s
need for foreign energy sources.
Conclusion
While ethanol production remains a priority
for the Brazilian government, oil production and
exploration accounts for the majority of Brazil’s
September 2006
progress toward energy independence. Oil still
accounts for 85% of Brazil’s gasoline usage and
efforts to improve the efficiency and increased
productivity of its oil platforms are well under-
way. Petrobras, the largest oil producer in Brazil,
is clearly focused on expanding domestic oil
production. Brazil may successfully wean itself
from foreign oil imports not by lessening its use
of oil, but by increasing domestic supplies.
The revived ethanol program does indeed
provide a fraction of Brazil’s energy needs.
Increased levels of production and greater
mechanization of sugarcane farming makes
Brazil the largest producer and exporter of
sugarcane and ethanol in world.
The claim of energy independence, however,
requires careful examination and interpre-
tation. Ethanol alone has not created an energy
independent Brazil; rather, increased oil pro-
duction has most significantly contributed to
achieving that goal. Those concerned about US
energy policy as well as advocates of ethanol
and other biofuels must recognize the realities
of Brazil’s energy program before insisting
upon the altering of our own.
5
Notes
1. Monte Reel, “Brazil’s Road to Energy Inde-
pendence: Alternative Fuel Strategy, Rooted
in Ethanol from Sugar Cane, Seen as Model,”
Washington Post (20 August 2006): A1.
2. “Lula: Independencia Petrolera,” BBC
Mundo Online, 22 April 2006, <http://news.
bbc.co.uk/hi/spanish/business/newsid_493
2000/4932910.stm> (9 August 2006).
3. “Brazil: International Country Analysis
Briefs,” Energy Information Administra-
tion, United States Department of Energy,
August 2006, <http://www.eia.doe.gov/emeu/
cabs/Brazil/Full.html> (30 August 2006).
4. David Luhnow and Geraldo Samor, “As
Brazil Fills Up on Ethanol, It Weans Off
Energy Imports,” The Wall Street Journal,
16 January 2006, <http://yaleglobal.yale.edu/
display.article?id=6817> (10 August 2006).
5. Ibid.
6. Christine Bolling and Nydia R. Suarez, “The
Brazilian Sugar Industry: Recent Develop-
ments,” Sugar and Sweetener Situation
Outlook, Economic Research Service, United
States Department of Agriculture, Sept-
ember 2001,<http://www.ers.usda.gov/
briefing/Brazil/braziliansugar.pdf#search=
%22%E2%80%9CThe%20Brazilian%20Sugar
%20Industry%3A%20Recent%20Developmen
ts%2C%E2%80%9D%22> (10 August 2006);
J. Goldemberg and T.B. Johansson (Editors),
“Energy As An Instrument for Socio-
Economic Development,” United Nations
Development Programme, 1995, <http://
www.undp.org/energy/publications/1995/
1995a.htm> (9 August 2006).
7. Hydrous ethanol requires less energy in
manufacture, but is incompatible with the
U.S. gasoline distribution system. In the
U.S., the limit on water in ethanol for fuel
use is 0.5%. Higher concentrations of water
lead to corrosion and phase separation
problems, which is probably the reason that
Brazil now primarily uses anhydrous
6 Marshall Institute Policy Outlook
ethanol; “Brazilian Energy Balance (BEN)
2005,” Ministério de Minas e Energia,
<http://www.mme.gov.br/site/menu/select_
main_menu_item.do?channelId=1432&pa
geId=6073> (9 August 2006).
8. Larry Rohter, “With Big Boost from Sugar
Cane, Brazil is Satisfying it Fuel Needs,”
The New York Times Online, 10 April 2006,
< h t t p : / / w w w. n y t i m e s . c o m / 2 0 0 6 / 0 4 /
10/world/americas/10brazil.html?
ex=1302321600&en=03adc82c67600388
&ei=5088&partner=rssnyt> (16 August
2006).
9. Stéphane His, “Panorama 2005—Biofuels
Worldwide,” Institut Français de Pétrole,
25 November 2004, <http://www.ifp.fr/
IFP/en/files/cinfo/IFP-Panorama05_07-
BiocarburantVA.pdf#search=%22Panoram
a%202005-%20Biofuels%20Worldwide%22>
(15 August 2006).
10. “Vehicles- Production, Domestic Sales and
Exports: Production by Fuel T ype,”
Brazilian Vehicle Manufacturer’s Associ-
ation (ANFAVEA), <http://www.anfavea.
com.br/anuario2006/Cap02_2006.pdf>
(14 August 2006).
11. Brazilian Energy Balance (BEN) 2005.
12. Bolling and Suarez; Goldemberg and
Johansson.
13. Robert Plummer, “The Rise, Fall and Rise of
Brazil’s Biofuel,” BBC News, 24 January
2006, <http://news.bbc.co.uk/2/hi/business/
4581955.stm> (9 August 2006).
14. Rohter.
15. Ibid.
16. Luis Carlos Corrêa Carvalho, “Ethanol:
Market Perspective,” Joint Seminar of the
International Energy Agency, the Brazilian
Government and the United Nations
Foundation, 20-21 June 2005, <http://
www.unfoundation.org/files/misc/biofuels_
presentations/Carvalho_biofuels_files/fram
e.htm> (15 August 2006); “How Did Brazil
 Achieve Energy Independence?” API Energy,
10 May 2006, <http://www.2006fuels.org/
ethanol_files/Brazil-Energy-Independence.
pdf> (7 August 2006).
17. Graham M. Pugh, “U.S. Biomass and
Biofuels Policies and Programs,” Office of
Energy Efficiency and Renewable Energy,
United States Department of Energy,
25 May 2006, International Business-
Government Counsellors, Inc. Seminar for
the Executive Council on Diplomacy, (20
July 2006).
18. “How Did Brazil Achieve Energy Inde-
pendence?”
19. Carvalho.
20. Pugh.
21. “Lula: Independencia Petrolera,” BBC
Mundo Online, 22 April 2006, <http://news.
bbc.co.uk/hi/spanish/business/newsid_493
2000/4932910.stm> (10 August 2006).
22. “Brazil: International Country Analysis
Briefs.”
September 2006
23. Ibid.
24. Ibid.
25. EFE, “Petrobras Eleva en un 5,4 Por Ciento
Su Producción en Abril,” Financiero.com,
7 May 2006, <http://www.financiero.com/
internaCont_idc_114037_id_cat_229.htm>
(9 August 2006).
26. Ibid.
27. Ibid.
28. David G.Victor, “Learning From Brazil,”
Houston Chronicle, 15 April 2006, <http://
www.chron.com/disp/story.mpl/editorial/out
look/3795206.html> (14 August 2006).
29. Bernd Radowitz, “Brazil Petrobras Plans
to Invest $87.1B From 2007-2011,” Dow
Jones Newswire, 3 July 2006, <http://www.
latibex.com/esp/prensa/noticiadj.asp?notici
a=202218> (22 August 2006).
7