This is one in a series of occasional articles exploring the consequences of falling oil prices for producers and consumers.
RIO DE JANEIRO -- More than 90 percent of the cars sold in this country today run on sugar-based alcohol, and the program Brazil began in 1975 after oil prices soared has become one of the world's model alternative fuel projects.
But now, the plunge in world oil prices -- a development that could prove a considerable boon to this Third World giant -- has intensified controversy over programs that represented the cornerstones of Brazil's intense drive for energy self-sufficiency when prices were high. These are the switch to alcohol fuel, which is twice as expensive to refine as is oil into gasoline, and plans to expand costly offshore oil drilling.
In general, the current fall in oil prices is pleasing to this heavily indebted country, promising some monetary relief. Brazil still consumes about 350,000 barrels a day of imported crude, and the price drop will shave hundreds of millions of dollars off oil import costs, which last year amounted to $5.6 billion.
A depressed international oil market also has enabled Brazil to arrange barter deals with oil-producing states desperate to dispose of supplies. Such trading arrangements have grown in volume and number since 1982 and, in addition to sparing Brazil hard currency, have provided new foreign orders for local industry and agriculture. More than 80 percent of the oil Brazil imported last year was bought in exchange for Brazilian products, ranging from steel and cars to meat and frozen chickens.
But the advantages of cheap oil for Brazil are clouded by the dilemmas it poses for government policy-makers. The lower the price of imported oil, the more expensive this country's switch to alcohol looks by comparison, and offshore drilling becomes relatively more costly.
Now both the strategic rationale of Brazil's energy self-sufficiency campaign and its economics are being reassessed in light of plummeting world oil prices.
Even senior officials at Petrobras, the country's state oil monopoly, argue in favor of continuing to buy some oil from foreign producers, given its reduced cost and the stimulus that oil-related barter deals offer Brazilian exporters.
"If you squeeze the margin for importing oil, you squeeze the room for exports," said a Petrobras official who asked not to be named. "For Brazil at this time, it is good to keep a margin. We must keep on exploring for oil, while trying at the same time to exercise control over our own production rate, making it an economic rather than a political issue."
After the oil shocks of the 1970s, Brazil's determination to become energy self-sufficient by the 1990s seemed both strategically urgent and economically sensible. Oil imports were a main factor behind Brazil's accumulation of its $104 billion foreign debt, the largest in the developing world.
As a result of the alcohol substitution program and aggressive domestic oil exploration, Brazil was able to reduce its net oil import bill from $10 billion in 1980 to $3.9 billion last year. Alcohol production, which topped 2.7 billion gallons last year, is estimated to have saved Brazil the need to import well over 100,000 barrels of oil per day.
But the program still requires large injections of state subsidies to keep it in operation.
Alcohol-fueled cars are less efficient than gasoline cars. So to make them more economical for consumers, the government has spent heavily, fixing the pump price of alcohol at 65 percent that of gasoline. It gives tax breaks to alcohol car owners, subsidies to distillers and benefits to alcohol producers in Brazil's impoverished Northeast.
Justifying these financial supports, the government says it is better to spend Brazilian cruzeiros subsidizing alcohol production than to spend hard-currency importing oil. Yet alcohol payments have contributed to a ballooning of Brazil's internal budget deficit. That deficit, which grew 20 percent last year, fanning inflation and high interest rates, is quickly replacing the foreign debt as the country's most serious economic concern.
"The alcohol program is a good example of Brazil having taken an external debt problem and made it an internal one," said a foreign diplomat. "The idea implicit in the subsidies was that somehow the cruzeiro was Monopoly money and could be spent freely without serious consequences."
Brazil had hoped to expand alcohol production and requested a $175 million loan from the World Bank. But the bank hesitated and, last year, voiced reservations about continued growth of alcohol output. "Given the decline in oil price forecasts, major expansion of investments of this size are not likely to be justified in the present decade," it said.
Approval of the loan awaits Brazil's decision on the program's future. A government commission is studying suggestions that the retail price of alcohol at the pump be raised to 75 percent that of gasoline and that tax advantages given alcohol car owners be reduced.
Resistance to major changes would be strong. The alcohol program was meant to be a flexible one, adjustable to fluctuations in the supplies and costs of energy alternatives. But it has given birth to a powerful lobby that includes sugar cane planters, owners of 400 private distilleries and 2 million alcohol car users as well as the auto industry, which was saved from a slump by the switch to alcohol-run cars.
Proponents say the program has created jobs in farming and industry. Critics say alcohol production has gotten out of hand, with sugar-cane plantations taking over prime farmland and crowding out other crops. Environmentalists say distilleries are poisoning the country with carcinogenic aldehydes.
The alcohol industry had been hoping that U.S. buyers, searching for alternatives to lead as octane boosters in gasoline, would soak up excess Brazilian production of ethanol and become a new growth market. But U.S. corn alcohol producers have put up stiff resistance and high barriers to Brazilian imports.
There is grudging acceptance by some Brazilian authorities that the alcohol program may have peaked. "We have to slow down the rate of producing alcohol by converting sugar cane plantations into other crops," said the Petrobras official. "If it's not possible to export, we'll have to reduce the production of alcohol." Brazil already has a substantial surplus.
Hydroelectric power and biological fuels such as alcohol each account for about a third of Brazil's energy needs. But petroleum remains vital as fuel for diesel-powered trucks and as feedstock for industry.
After an intensive 10-year domestic exploration effort, Brazil has managed to push its own oil production to more than 600,000 barrels a day, filling about 60 percent of its oil needs, compared with 18 percent in 1980. Brazil has even become an oil exporter, refining and exporting 160,000 of the 500,000 barrels a day of crude it imported last year. The rest was used here.
The recent discovery of a vast offshore field off Rio de Janeiro state has the potential of doubling Brazil's oil output. But the oil is far under the surface of the ocean, and its extraction would be costly.
"What the drop in oil prices will do will be to make the oil off the coast uncompetitive," said Jose Goldemberg, who last week became chancellor of the University of Sao Paulo after heading Sao Paulo's power company. "Pressure on the external balance of payments was what drove Brazil to dig so intensively for oil. Now the drop in prices will slow Petrobras from looking for oil at any cost."
Goldemberg also predicted a setback for energy conservation efforts as a result of availability of cheaper oil. "We were gearing up for big conservation programs," he said. "That, of course, is going to be discouraged by the low oil prices, which will also make the life of electricity companies, which were becoming strong competitors to oil, very hard."