How the OPEC oil embargo sparked energy independence — in Brazil

Source: Tiffany Stecker, E&E reporter • Posted: Friday, October 18, 2013

Forty years ago, the Organization of the Petroleum Exporting Countries placed an embargo on petroleum, bringing an oil-addled world to its knees.

As oil prices quadrupled, the world panicked. In the immediate aftermath, gas stations closed on Sundays. Small, fuel-efficient cars became popular. The U.S. government initiated the first programs into developing solar power and electric vehicles.

And Brazil — a developing country under military dictatorship at the time — began the push for what has become the most successful biofuel industry in the world.

Brazil relied on imported oil in the 1970s, and about 80 percent of the petroleum consumed was imported, said Alfred Szwarc, an emissions and technology consultant for the Brazilian ethanol trade group UNICA. In response to the embargo, the government pushed for a number of research and development programs. The most successful was the National Alcohol Program, or “Proalcool.”

“The program was based on the concept that ethanol made from sugar cane could in a first step substitute gasoline partially in the form of gasoline-ethanol blends and in a second step substitute gasoline totally, becoming the fuel of choice,” Szwarc said. The program made an effort to phase out fossil-fuel vehicles by subsidizing ethanol production and encouraging carmakers to build ethanol-ready vehicles.

The government also mandated a 10 percent ethanol gasoline blend in the fuel supply. By 1977, gasoline-ethanol blends had arrived at the pump. The first flex-fuel cars were on the road two years later. Brazil’s military government concentrated the power with an iron fist. Petrobras, the state-owned oil company, was key in developing a nationwide distribution system of pumps.

The sugar cane industry invested in new fields. New ethanol mills dotted the landscape. The World Bank and national financial institutions structured a financing system to support the investment.

The public’s initial reaction was mixed, said Barbara Bramble, board chairwoman of the Roundtable on Sustainable Biofuels, who has worked on biofuel issues in Brazil since the 1980s.

“They didn’t have very good quality control of the fuel,” she said. “A lot of people would start to buy it and their cars wouldn’t work very well, so it got a horrible rap.”

Low oil prices, democracy threaten ethanol

The oil embargo of 1973 pushed Brazil to consider a two-pronged strategy for fuel: to replace oil use with ethanol and work more intensely to identify petroleum sources in Brazil, said Carlos Henrique de Brito Cruz, scientific director of the São Paulo Research Foundation, an independent body to promote scientific and technology research.

Small, family-owned businesses were making ethanol for the first ethanol-only cars. By 1980, the Proalcool program was well-established in the country. A decade later, the dictatorship had transitioned into democracy. By this time, the price of oil had also dropped, and the newly democratic government undertook a heavy burden in ethanol subsidies.

“However, the government could not shut it down in one step because so many people had ethanol cars,” Brito said. “They had believed in the government saying, ‘Buy an ethanol car, we will make ethanol available,’ and so on; there was a lot of tension between fiscal pressure and the number of cars in the street.”

Brazil’s economy was in bad shape. The government decided to drop the subsidies, and ethanol car owners were left without a fuel source.

“In those years, there was a lot of loss in the credibility of the ethanol program,” Brito said.

But the country continued to support technology investments in ethanol vehicles, despite the United States’ and the World Bank’s disagreement that such payments were unwise, Bramble said.

“They were right,” she said. “They were able to persevere, get through the very low-price years, and now they have a competitive industry.”

‘God is Brazilian’

Ethanol’s saving grace came in the early 2000s. By then, the technology had advanced to a point where flex-fuel vehicles — cars that can take a wide variety of ethanol-gasoline blends — could be produced efficiently. The timing was good. Oil prices had, again, taken an upswing.

“The decision on which fuel people would use was transferred from the government to consumer,” Brito said. Flex-fuel cars rapidly became the best-selling cars in Brazil.

Vehicles in Brazil can run on up to 100 percent ethanol, with flex-fuel cars that can take advantage of fluctuating prices of ethanol and gasoline to pay less at the pump. Last year, about 95 percent of cars in Brazil were flex-fuel vehicles, Brito said.

It’s not easy to compare Brazil’s response to the embargo with the United States’, Szwarc said. As the world’s largest economy, the United States has financial abundance, and Brazil was a developing country.

Today, Brazil is experiencing its own oil boom, much like the U.S. shale explosion. The Brazilian government has said that these “pre-salt” oil reserves off the coast would not compete with ethanol, but these assurances remain to be proved, Szwarc said.

The country has also discovered significant oil reserves offshore, with a recent estimate projecting a 325,000-barrel-per-day output by next year. It is strong evidence, then-Brazilian President Inacio Lula da Silva said in 2007, that “God is Brazilian.”

Like in the United States, which will overtake Russia next year as the world’s largest oil producer according to the International Energy Agency, scarcity does not hold the same importance as it did in 1973.

Still, the United States continues to import more oil today than in 1973, said Carol Werner, executive director of the Environmental and Energy Study Institute. While scarcity is no longer an issue, the dependence remains, with the additional problem of oil’s contribution to accelerating climate change.

“It’s an opportunity to be reflective: What are the challenges that we are facing and we need to face ahead?” she said.

Walking around the blend wall

Advances in the production of sugar cane ethanol have allowed the fuel to achieve a much more favorable environmental profile than corn ethanol. Unlike its corn-based counterpart, it reduces greenhouse gas emissions by at least 50 percent, allowing it to be considered an “advanced” biofuel under the U.S. renewable fuel standard.

The RFS is similar to the beginning of the ethanol program, Brito said, in its efforts to create an incentive for a burgeoning industry. In fact, it could look to Brazil for lessons.

“We need to focus on being as smart as the Brazilians,” R. James Woolsey, former director of the CIA and chairman of the Foundation for Defense of Democracies, said in a discussion on energy security and independence. Instead of ethanol, the United States could create incentives for methanol, another alcohol-based fuel that could come from natural gas or agricultural sources

The United States’ ethanol program, which was propelled by the 2005 Energy Independence and Security Act of 2005, was similar to Brazil in its disbursement of tax incentives, loans and other production-side policies. But it differed on one important point, said Brooke Coleman, executive director of the Advanced Ethanol Council.

“Brazil did all the market-type stuff that we failed to do,” he said, referring to the construction of ethanol pumps and pipelines and the deployment of ethanol vehicles.

Because the United States has not widely encouraged the development of flex-fuel vehicles, the country now faces the possibility of a blend wall: too much ethanol and not enough gas tanks to take it.

Brazil “just walked around the blend wall,” Coleman said.

The goal for the United States shouldn’t be to completely displace oil, experts said, but to encourage a greater mix of fuel sources.

“The point here is not to get totally off petroleum, it’s to loosen up the market,” Bramble said.

“If we had started with electrification via solar and wind with just a tiny but steady support 40 years ago,” as Brazil did, she added, “we would be there by now, we would have independence by now.”