Brazil raises cane

Under orders from the federal government to help clean up the air, petroleum refineries have for years been using an oxygen-rich chemical called methyl tertiary butyl ether (MTBE) to make gasoline burn cleaner.

But in recent years, MTBE—which is known to cause cancer—has been showing up in groundwater supplies. It seems the stuff just refuses to stay put in the concrete tanks where gasoline is stored. What’s worse, MTBE has the ability to help gasoline travel farther, faster, as it leaks into the ground.

Environmentalists and public health advocates convinced California to schedule a phase-out of MTBE by 2003. But the only cost-effective alternative is ethanol, which is usually made from corn, a crop the state fears it may not be able to import in quantities great enough to avoid price spikes at the gas pump when MTBE is banned.

The administration of Governor Gray Davis applied for a waiver from the federal requirement of oxygen-rich chemicals, arguing California refiners have the technology to make cleaner-burning gas without MTBE or ethanol.

But in June, the Bush administration denied California’s waiver, effectively requiring Golden State refiners to buy ethanol. That decision was a boon for the Cornbelt states that helped elect Bush, and drew accusations of a political quid pro quo.

Forced to adhere to the ethanol requirement, California EPA Secretary Winston Hickox says the price of California gasoline could jump when MTBE is outlawed: “We’re at the mercy of another commodity that’s traded on the market and has price volatility attached to it. That will affect the price of gas.”

Compounding the supply problem, Connecticut and New York are on schedule to phase out MTBE in coming years, and other states are debating the idea.

Midwest ethanol producers say they can double their production capacity by 2006, but California officials see a costly shortage as inevitable in the short-term. According to the California Energy Commission, the phase-out of MTBE means that by 2003, the state will have to import more than six times as much ethanol as it does now.

One possible short-term solution is to push back the date for the MTBE phase-out, an idea Davis hasn’t ruled out. But environmentalist Dan Jacobson at the California Public Interest Research Group says a later deadline for banning MTBE from California is a “nightmare scenario.”

Enter the agricultural powerhouse of South America.

In Brazil, ethanol is made from sugar cane, which makes the world’s largest sugar producer also the world’s largest ethanol producer. Brazilian sugar barons are chomping at the bit to get into the U.S. market. They say they’ve got the cane, the boats and the bodies to keep gas prices stable while the Midwest gets up to speed. But, they complain, a protectionist tariff keeps them out of the U.S. market.

Eduardo Pereira de Carvalho is leading the charge to get that tariff reduced. Carvalho is the new president of the Union of Sugarcane Agroindustry, representing some 60 percent of the country’s sugar producers.

He has served as Brazil’s Secretary of Agriculture and its Secretary-General of Finance. Before he got into sugar, Carvalho was Vice President of the largest iron ore concern on the planet, Vale do Rio Doce and Company.

SN&R: It’s a long way from Brazil to California. Does the Brazilian sugar industry have the capacity to get its ethanol to the California market cost-effectively?

Carvalho: There is no doubt in my mind. We have the lowest prices for ethanol on the planet. We have a sugar industry that’s old and established. We have ample supplies of cane. We have made unprecedented investments in supply-line infrastructure. We now have an industry that’s almost totally privatized. We can get our product to market and provide California with the ethanol it needs to make up for the coming shortage.

And the tariffs are all that’s keeping you back?

The USA charges us 54 cents per gallon to import our ethanol. That’s specifically intended to keep us out, and it does. But we think it would be in the interest of the California consumer to reduce this tariff.

What does the consumer have to gain allowing you to import your ethanol?

We could increase the supply. Brazilian imports can help avoid jumps in the prices Californians pay for gasoline at the pump. I have indications that an important number of states are going to ban MTBE, and the USA will need more ethanol than it can currently produce domestically.

There’s also a strategic advantage in importing ethanol, especially since the terrorist attacks of September 11. Much of the American petroleum supply comes from places which are politically unstable, or at war. When you add ethanol to your gas, you are reducing the total amount of petroleum you need. That reduces your dependence on petroleum from the Middle East.

But what about the corn interests in the Midwest?

Look, this is a market that’s going to double in size in the next few years. There is room for everyone at the table. The Midwest cannot keep up with the new demand. I had this conversation with the governor of Nebraska the other day.

But then you’d have a foothold in the USA, and the people of the Midwest might resent the foreign competition. That’s a lot of jobs, a lot of voters.

The Midwest has no reason to fear us. We want to help the Midwest get enough ethanol to the American market. We’re not talking about taking over the ethanol industry in the United States. We only want temporary access to the market, for however long it takes the Midwest to get up to speed. We want to complement what the Midwest is supplying.

What do the California refiners think?

California refineries want our product. There are infrastructure problems in the USA when it comes to delivering ethanol to the West. That’s going to make gasoline more expensive. And in the short-run—I’m talking about right now, before the MTBE ban kicks in—the refiners in California don’t want the potential liability of distributing any more gasoline with MTBE. I understand they could be sued for contributing to pollution in the ground water.

And we can help California refiners make money. The value of gasoline goes up with the addition of ethanol because it helps the fuel burn. It’s got more oxygen than MTBE. With ethanol, gasoline is two times more effective as a fuel.

But according to Davis, California refiners are capable of making gas even cleaner without ethanol or MTBE.

We don’t think that’s true. I’ve seen a lot of scientific data on this topic, and I’m not convinced. We Brazilians have a lot of experience with petroleum products. We have been studying gasoline formulas for almost 80 years. For the last 20 years, all the cars in Brazil have been burning gas that’s 22 percent ethanol, and the positive environmental effects are obvious.

Speaking of the environment, those Californians who don’t agree with President Bush’s decision not to comply with the Kyoto Protocols [concerning global warming], they can find some comfort in knowing there is a way around the problem. Our product can improve the environment in California. Plus, it’s a renewable resource.

The media have painted this as a fight between the governor of California and the president of the United States. They were at odds before this, when the governor wanted help from the president with our energy crisis. Do you think the Davis administration is looking to the Brazilians as a way to avoid buying Midwestern ethanol just to get back at the president?

Look, I don’t want to get between the United States government and the government of California. We just want the governor of California to know he has options. Our people are ready to go.