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Jan 17, 2013 | 18:56 GMT

Brazil: Reconciling Energy Needs With Fuel Prices

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Brazil: Reconciling Energy Needs with Fuel Prices

The Brazilian government is trying to reconcile the needs of state-controlled energy company Petroleo Brasileiro, commonly known as Petrobras, with its own desire to keep inflation low for the sake of the country's consumer market and manufacturing sector. As part of this goal, Brasilia appears intent on promoting ethanol consumption. Brazil has the world's most developed ethanol industry. In response to the 1973 oil crisis, Brazil sought to become self-sufficient in transport fuel by focusing on an abundant domestic resource: sugarcane. The subsidization of the ethanol industry enabled Brazil to greatly advance its ethanol production, which facilitated the integration of ethanol into the transport fuel market. (More than half of all passenger cars and light trucks in Brazil are either flex fuel or ethanol-only.) By government mandate, ethanol must constitute 20 percent of all gasoline produced. According to recent media reports, the government may announce a 7 percent increase in gasoline prices as early as next week. Moreover, there is speculation that the government will soon increase the mandated blending of ethanol in gasoline from 20 percent to 25 percent. The promotion of ethanol consumption has not been as economically viable in recent years; increased consumption and poor sugarcane harvests have driven up the price of ethanol, which in turn has contributed to the rising demand for gasoline. As a result, Petrobras has been forced to import more gasoline to meet demand, and the company's finances have become stressed accordingly. A greater reliance on ethanol might make prices more volatile — the agriculture sector is inherently unpredictable — but it could allow Brasilia to more easily implement the gasoline price hike Petrobras has been pushing. Additionally, even though ethanol production has been inconsistent in recent years, sugarcane production is projected to stabilize and increase through 2014. If production rises as predicted, Brazil could control fuel prices more effectively. Using ethanol prices to regulate fuel prices overall would help advance Brazilian President Dilma Rousseff's plans to promote manufacturing while serving the interests of Petrobras — especially if higher gasoline prices cause flex-fuel owners to choose ethanol.

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