BRAZIL-US:
Ethanol Deal Represents Convergence of Multiple Interests
Mario Osava

RÍO DE JANEIRO,  (IPS) - The new partnership to promote the use of ethanol agreed during U.S. President George W. Bush's visit to Brazil is the result of the convergence of varied interests between the two countries.

"If you're dependent on oil from overseas, you have a national security issue," said Bush, explaining the U.S. decision to diversify energy sources and to reduce domestic consumption of gasoline by 20 percent over the next 10 years. He was speaking during a visit he made with host President Luiz Inácio Lula da Silva to an ethanol plant in the city of Sao Paulo.

It is also a question of economics, given the rise in oil prices driven by growing demand in countries like China and India, said Bush, who was shown Brazil's "totalflex" cars, which run on gasoline, ethanol, or a blend of both in any proportion.

The United States also produces flexible fuel vehicles, but the proportion of ethanol cannot top 85 percent.

Bush did not explicitly refer to Venezuela -- governed by his nemesis, President Hugo Chávez -- or the Middle East as fossil fuel sources that accentuate the risks of U.S. energy dependence, although analysts recognise them as factors that have awakened the U.S. administration's interest in drastically increasing the use of alternative fuels.

The United States depends on Venezuelan oil for around 11 percent of its domestic demand for fuel.

Japan has put into effect a programme that will lead to the gradual adoption of the use of ethanol, allowing a three percent non-obligatory blend of ethanol, with the goal of increasing that to 20 percent by 2030. Europe has also adopted gradual plans, with an emphasis on biodiesel.

But Bush wants to multiply national consumption of ethanol sevenfold in just 10 years.

In the joint press conference, President Lula emphasised the social aspects of the new alliance. The new cooperation with the United States, he said, will create the conditions to "convince the world that everyone can change the energy blend," by generating "a global market for biofuels" that will "democratise access to energy," create jobs and reduce poverty in developing countries.

Biofuels are the best way to promote development in poor countries in regions like Africa, Central America and the Caribbean, said the Brazilian leader. Rich countries should finance production projects in poor countries and open up their markets to their products, instead of providing aid, he argued.

The memorandum of understanding signed Friday by the two governments states that biofuels are a "transformative force in the region to diversify energy supplies, bolster economic prosperity, advance sustainable development, and protect the environment."

The agreement entails cooperation in research and development of next-generation biofuel technology, such as ethanol production from cellulose, which will increase productivity of raw materials and incorporate new ones, since any biomass can become a source for fuel.

For example, the new technology will allow Brazil to take advantage of sugar cane bagasse and leaves, increasing productivity threefold, say experts. Wood, weeds and other plant waste products can also be transformed into ethanol.

In the United States, corn is now the main raw material used to produce ethanol, while in Brazil it is sugar cane.

Brazil, a pioneer in ethanol production, has been replacing gasoline with the alternative fuel for 32 years. But although Brazil currently is the leader in ethanol technology, the United States, with its superior capacity in R&D, is likely to make faster progress in terms of producing ethanol from cellulose.

Brazil is thus interested in a technological alliance to maintain its competitiveness in the future. The United States already produces more ethanol than Brazil: nearly 18 billion litres a year, compared to the South American giant's 17 billion. But Brazil has a large competitive advantage, with production costs nearly one-third below those of the United States.

Brazil also hopes to boost its sales to the United States, which totalled 1.6 billion litres last year. Part of these sales were through Central American and Caribbean nations that have signed free trade deals with the United States and re-export Brazilian ethanol tariff-free.

Another facet of cooperation will be with third countries, where private sector investment in biofuels will be stimulated.

The strategy will begin with Central America and the Caribbean, for local production and consumption, especially of ethanol. That would create another potential supplier for the huge U.S. market, which will need 132 billion litres a year of ethanol if the 2017 target set by Bush is to be met.

The Brazil-U.S. agreement is also aimed at fomenting a global biofuels market, with the definition of technical rules and regulations. To this end, the two countries will work together in the International Biofuels Forum, in which India, China, South Africa and the European Union are also participating.

In terms of bilateral trade, the Brazilian government and business community are calling for the elimination or reduction of U.S. tariff barriers to Brazilian ethanol, which is taxed at 54 cents per gallon, plus a 2.5 percent tariff.

But Bush said the tariff, which was extended to 2009 by the U.S. Congress, would not immediately be removed.

The association between the world's two largest ethanol producers, which account for around 70 percent of all ethanol production, could have broad repercussions. An agreement between Brazil and the United States, for instance, could help unblock the World Trade Organisation (WTO) Doha Round of multilateral trade talks, said Lula.

The new biofuels fever also modifies the global outlook in agriculture, holding out possibilities of opening up solutions to the dismantling of farm subsidies shelled out by the United States and the European Union, which are the biggest obstacle in the Doha Round.

To develop the biofuels market, the Brazilian government has already offered cheap loans to companies interested in building plants. The public National Bank for Economic and Social Development provided nearly one billion dollars in financing towards that end in 2006, and could raise that amount by 25 percent this year.

Over the next six years, Brazil will open one ethanol factory a month on average, bringing the total number from the current 336 to 409 by 2013.

Bush's one-week Latin America tour is also taking him to Uruguay, Colombia, Guatemala and Mexico.