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GASOLINE PRICES, ETHANOL AND BRAZIL


Oil refinery photo: NY Times May 24, 2007

According to today's NY Times: "Gas prices are spiking again -- to an average of $3.22 a gallon.... And some oil executives are now warning that the current shortages of fuel could become a long-term problem.... They point to a surprising culprit: uncertainty created by the government's push to increase the supply of biofuels like ethanol in coming years."

Meanwhile, here in Brazil, Toyota is introducing a new line of flex-fuel cars that run on both ethanol and gasoline. Because ethanol is generally cheaper at the pumps (even when the price is adjusted for the fuel being 30% less efficient), 8 out of 10 new vehicles are of the flex-fuel type. (Associated Press)

I think that these articles might give an inaccurate impression that: 1) auto fuel is terribly expensive in the US and that 2) Brazil demonstrates that a simple shift to ethanol can solve the fuel crisis.

The US is about to shift to using more biofuels simply because the supply of inexpensive oil is shrinking and because it is increasingly concentrated in the hands of foreign regimes that are not necessarily friendly to its interests. It would be a mistake to think that this shift will result in lower prices at the pumps.

Indeed the problem is that fuel prices in the US are way too low. Yes, Brazilians are switching from gasoline which presently costs, here in São Paulo, about $4.60 per gallon in US dollars to ethanol which runs about $3.50 (when the price is adjusted for lower mileage). But that $3.50 per gallon for ethanol is not only higher than the current US average for gasoline but it is an enormous price when faced by a population that has one fifth the average annual income of Americans.

Brazilians are certainly leading the way toward having a bio-fuel economy that can provide self-sufficiency. But that is because the relative price of fuel is so high that they cannot afford gas-guzzlers and wasteful driving habits. The same thing will happen in the US when low costs at the pumps are no longer promoted by having no energy policy. As soon as the price is right, Americans (like Brazilians) will shift toward better technologies and behaviors.