Wednesday, February 14, 2007

Brazil, Petroleum, Ethanol and Regional Trade: U.S. Hunger is Brazil's Potential Gain

I recently wrote about Brazil’s exploitation of its global position in ethanol markets to further its global trade agenda expanding the ethanol market to the energy consumer markets in China and India and the restructuring of its trade relations with the United States), and the American willingness to encourage that agenda for its own purposes (tweaking Venezuela’s Chavez and trying to resurrect the Free Trade Areas of the Americas). Brazil, the United States, Globalization and Ethanol. Even in this context, where cooperation appears to advantage Brazil, Simon Robinson was right to comment that “I can't say that the Brazilians are particularly enamored of the prospect of the US trying to use their technology as a way of dealing with Chavez and others in Latin America.”

Robinson recently highlighted the conflicted context in which biofuel policy is being weighed. He noted in his Big Biofuels Blog the way the Inter-American Development Bank leaders are sending mixed signals about this potential partnership to expand ethanol production. On the one hand the Inter-American Bank hails the American efforts to increase biofuel consumption in Latin America (with US produced ethanol—made more efficiently with Brazilian technology), on the other hand, Luis Alberto Moreno, the Bank’s president notes that in the absence of cultivating more corn, the increased production of corn based ethanol in the United States (id.) (and sugarcane based ethanol in Brazil, will reduced arable land devoted to food production.

Two recent reports highlight these conflicts within Brazilian energy policy circles. The first, reported that a U.K. oil explorer, BG Group PLC “said the Tupi field in Brazil, which it is exploring with state-run oil firm Petrobras . . . , could contain over 10 billion barrels of oil and gas.” BG says Brazil's Tupi may be 10 bln-barrel field, Reuters (Feb. 8, 2007). Brazil continues to aggressively exploit its petroleum reserves. The second reported the signing of agreement between Brazil, Sweden and Japan that will result in a doubling of Brazil’s ethanol exports by 2010. Brazil To Double Ethanol Exports – Minister, Reuters (Feb. 5, 2007) . The Brazilian Finance Minister, Guido Mantega “said he hoped the latest round of world trade talks would help open the U.S. market to Brazil's ethanol.” He noted that “"Our costs are 50 percent lower and the quality of the energy source is higher than the ethanol made from corn (maize) in America. So we can have more co-operation with America if they open the possibility for more imports from Brazil of ethanol and other agricultural products," Mantega said.” Id.

Brazil is hedging in several ways. It continues to maximize its ability to exploit its own petroleum reserves. This serves it well as it seeks to protect itself from its brothers in Venezuela and Bolivia. It enhances economic stability and gives Brazil more leverage in its negotiations with other states. But it can also make life harder for both by cultivating its ethanol production, and the development of markets for this alternative—for which Brazil requires increasing petroleum prices. It looks like Japan and Sweden are already preparing for such a change in the relative economies of ethanol use, and the United States wants to get into the act as well.

But the Brazilians have little to fear for the moment and much to gain from the interest of the United States. Sharing technology and bringing the Americans on as partners opens U.S. markets at relatively little cost to the Brazilians—their ethanol production costs are still half that of the United States. And the potential benefits to Brazil—reduction of critically annoying tariff barriers—are great. And there is an added benefit as well, one that Simon Robinson highlighted in describing the position of the Inter American Bank—the price and availability effects of ethanol production on the food supply. For Brazil this presents an opportunity. The need to produce biofuel and food may make it possible for Brazil to reduce the international pressure to avoid exploiting the Amazon for purposes of producing both. Brazil can only profit from an arrangement in which it can induce the United States to help it exploit biofuel markets (especially in China and India) in which its production costs will remain substantially below that of the Americans for a long enough time.

Now is the time for Brazil to bargain hard for the creation of a common biofuel market between NAFTA and MERCOSUR. Free movement of fuel, especially renewable fuel, would be in Brazil’s interest. If it can be tied to general trade policy, all the better. The Americans are willing right now to pay for the privilege of disadvantaging Chavez. The Brazilians have the most to gain from this American desire. In this back and forth is a great example of the multi-level complexities of economic globalization. Rather than merely a simple bi lateral problem among Brazil and the United States, the issue of energy and energy markets touches on the construction of regional trade partnerships, the construction of private markets by public entities, the convergence of environmental and energy concerns as well as of food and energy policies, and the ways in which states, as market makers and market participants now engage in global systems.

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