Understanding Brazil's fuel and biofuel markets is like trying to figure out what the heck that South African sign language interpreter was saying at the Nelson Mandela funeral.
That's partly because, even though Brazilian petroleum fuel pump prices are among the highest in the world, they are also in effect subsidized at the wholesale level. After all, pump prices are a key part of the group of goods whose monthly price variations are added to economists' calculations of—All Latin Americans, please cover your ears—inflation. And nobody wants inflation to go up again.
Why do you care? Because the U.S. buys about 490 million gallons of sugarcane-based ethanol each year from Brazil, and, in 2011, we sold about 105 million gallons of corn ethanol to the South American country. So it pays to understand at least the outer few layers of the conundrum wrapped in a riddle that is Brazilian biofuels and inflation policy. And because the U.S. government is right now considering big changes to the RFS which could greatly affect the domestic ethanol market.
Growing demand for imported diesel
Last year, economists Marcelo Colomer and Ana Tavares wrote that Brazilian demand for gasoline and diesel grew 32% and 40%, respectively, from 2000 to 2012. But during that same time, gasoline and diesel production grew just seven percent, with the establishment of three new refineries. So even though Brazil can produce ever more petroleum, oil platforms are going up faster than refineries. One study indicates that 15 to 20%of all the diesel used in Brazil is imported.
Petrobras, like anyone else, has to buy gasoline and diesel on world markets, and at world prices. But unlike everyone else, the semi-public Brazilian energy company can't simply raise its prices to distributors when costs go up. That would make (cover your ears again) the inflation index go up.
So Petrobras points out that it ends up eating a lot of losses for higher prices it can't pass on. The 739 million gallons of biodiesel Brazil used instead of imported biodiesel, in 2012, certainly helped. But the country also used 14.8 billion of petroleum diesel, much of which was imported at international rates.
So Petrobras finally got the Brazilian administration to let them charge a bit more at wholesale for their gasoline and diesel fuel, despite the fact that such increases would likely nudge inflation higher. In November, the administration said it could charge more to distributors for gasoline and diesel. At one São Paulo station, the retail increase came to more than nine percent.
There's just no pleasing some people…
Now, you would think that would make the ethanol folks happy. In a country where flex-fuel cars dominate, and where every gasoline station has a neat ethanol pump so that you can set your own blend, you would think customers would buy more ethanol in immediate response to any rise in petroleum fuel prices.
You would think.
But here's the thing: You need lots of diesel fuel to make ethanol from corn, and you need lots of diesel to make the so-called "Sweeter Alternative" (ethanol from sugarcane.) Diesel for the planters, combines, trucks and even employee buses. Brazil's sugarcane producers say the increase in diesel costs more than outweigh the pump price advantage between ethanol and gasoline as a result.
So get out your program. It's time for review. The Brazilian administration doesn't mind high fuel prices, but it hates increases. High fuel prices mean greater tax revenue and lower subsidies. But the administration doesn't like price changes. Price changes equal inflation, a no-no. Increases in petrofuel costs should please the makers of alternative fuels in a country full of neat ethanol pumps and flex-fuel cars, where motorists should be able to react immediately to the slightest price changes between ethanol and gasoline. But it takes a lot of diesel to make that ethanol, and diesel costs have gone up so that any benefit ethanol may have at the pump against gasoline is wiped out by the increased cost of production from higher diesel costs.
Did you get all that… or do you need that sign language interpreter?