History of Ethanol Fuel in Brazil - The Pro-Alcohol Era

The Pro-Alcohol Era

As a response to the 1973 oil crisis, the Brazilian government began promoting bioethanol as a fuel. The National Alcohol Program -Pró-Álcool- (Portuguese: 'Programa Nacional do Álcool'), launched in 1975, was a nation-wide program financed by the government to phase out automobile fuels derived from fossil fuels, such as gasoline, in favor of ethanol produced from sugar cane. The decision to produce ethanol from sugarcane was based on the low cost of sugar at the time, the existing idle capacity for distillery at the sugar plants, and the country's ample tradition and experience with this feedstock. Other sources of fermentable carbohydrates were also explored such as manioc and other feedstocks. The first phase of the program concentrated in production of anhydrous ethanol for blending with gasoline.

After testing in government fleets with several prototypes developed by the local subsidiaries of Fiat, Volkswagen, GM, and Ford, and compelled by the second oil crisis, the first 16 gasoline stations began supplying hydrous ethanol in May 1979 for a fleet of 2,000 neat ethanol adapted vehicles, and by July, the Fiat 147 was launched to the market, becoming the first modern commercial neat ethanol-powered car (E100) sold in the world. Brazilian carmakers modified gasoline engines to support hydrous ethanol characteristics and changes included compression ratio, amount of fuel injected, replacement of materials that would get corroded by the contact with ethanol, use of colder spark plugs suitable for dissipating heat due to higher flame temperatures, and an auxiliary cold-start system that injects gasoline from a small tank in the engine compartment to help starting when cold. Six years later around three quarters of Brazilian passenger cars were manufactured with ethanol engines.

The Brazilian government also made mandatory the blend of ethanol fuel with gasoline, fluctuating from 1976 until 1992 between 10% and 22%. Due to this mandatory minimum gasoline blend, pure gasoline (E0) is no longer sold in the country. A federal law was passed in October 1993 establishing a mandatory blend of 22% anhydrous ethanol (E22) in the entire country. This law also authorized the Executive to set different percentages of ethanol within pre-established boundaries, and since 2003 these limits were fixed at a maximum of 25% (E25) and a minimum of 20% (E20) by volume. Since then, the government has set the percentage on the ethanol blend according to the results of the sugarcane harvest and the levels of ethanol production from sugarcane, resulting in blend variations even within the same year.

Since July 2007 the mandatory blend was 25% of anhydrous ethanol and 75% gasoline or E25 blend. As a result of supply shortages and high ethanol fuel prices, in 2010 the government mandated a temporary 90-day blend reduction from E25 to E20 beginning February 1, 2010. As supply shortages took place again between the 2010-2011 harvest seasons, some ethanol was imported from the United States and in April 2011 the government reduced the minimum mandatory blend to 18 percent, leaving the mandatory blend range between E18 to E25.

The Brazilian government provided three important initial drivers for the ethanol industry: guaranteed purchases by the state-owned oil company Petrobras, low-interest loans for agro-industrial ethanol firms, and fixed gasoline and ethanol prices where hydrous ethanol sold for 59% of the government-set gasoline price at the pump. These incentives made ethanol production competitive.

After reaching more than 4 million cars and light trucks running on pure ethanol by the late 1980s, representing one third of the country's motor vehicle fleet, ethanol production and sales of neat ethanol cars tumbled due to several factors. First, gasoline prices fell sharply as a result of the 1980s oil glut. The inflation adjusted real 2004 dollar value of oil fell from an average of US$78.2 in 1981 to an average of US$26.8 per barrel in 1986. Also, by mid-1989 a shortage of ethanol fuel supply in the local market left thousands of vehicles in line at gas stations or out of fuel in their garages. At the time ethanol production was tightly regulated by the government, as well as pricing of both gasoline and ethanol fuel, the latter subject to fixed producer prices. As a complement, the government provided subsidies to guarantee a lower ethanol price at the pump as compared to gasoline, as consumers were promised that ethanol prices would never be higher than 65% the price of gasoline. As sugar prices sharply increased in the international market by the end of 1988 and the government did not set the sugar export quotas, production shifted heavily towards sugar production causing an ethanol supply shortage, as the real cost of ethanol was around US$45 per barrel. As ethanol production stagnated at 12 billion liters and could not keep pace with the increasing demand required by the now significant ethanol-only fleet, the Brazilian government began importing ethanol from Europe and Africa in 1991. Simultaneously, the government began reducing ethanol subsidies, thus marking the beginning of the industry's deregulation and the slow extinction of the Pró-Álcool Program. In 1990, production of neat ethanol vehicles fell to 10.9% of the total car production as consumers lost confidence in the reliability of ethanol fuel supply, and began selling or converting their cars back to gasoline fuel.