Program Gone Awry : Brazil Suffers Alcohol-Fuel ‘Hangover’

The Volkswagens, Chevrolets and Fords that roll out of automobile factories here are uniquely Brazilian: About 90% of cars produced for use in Brazil run on 185-proof alcohol instead of gasoline.

Alcohol engines may be a little harder to start on a cold morning than gasoline engines. But the smog, which takes on a faintly sweet odor from the alcohol exhaust fumes, is less toxic.

And Brazil saves 200,000 barrels of gasoline a day by using alcohol fuel produced in a huge new network of distilleries from sugar cane, which is grown on a scale unmatched anywhere in the world.

These are the remarkable results of a developing country’s bold response to the world petroleum crisis.

Subsidies Drain Resources

But while Brazil was building up its alcohol program, the petroleum crisis evaporated, and now there are problems. Brazilian oil refineries are pumping out unneeded gasoline while the economic advantage of gasoline’s lower cost is lost. Subsidies for the high-cost alcohol program drain government resources.

To hear Brazilian auto manufacturer Joao Gurgel describe it, the alcohol program has turned from a questionable remedy into a menacing disease.

“Alcohol is the AIDS of Brazil, and we don’t know how to cure it,” Gurgel said in an interview. “Sometimes I don’t sleep because I know that our country is going to be destroyed by this problem.”

Brazil is struggling unsuccessfully with a monthly inflation rate of about 25%, which Gurgel blames largely on the alcohol program. In an interview, he complained that expensive alcohol artificially inflates all fuel prices, adding to production and transportation costs for most goods. Also, higher fuel prices have reduced demand for cars, he said, and stunted the growth of Brazil’s important automobile industry.

Alcohol producers argue that fine-tuning will improve the alcohol program, which they insist is needed for the inevitable day when petroleum prices go back up. Meanwhile, they say, the alcohol industry provides more than 500,000 jobs, far more than the oil industry, and contributes to prosperity in large areas of Brazil.

“I am convinced that it is a good deal for Brazil,” said Luiz Ribeiro Pinto.

Pinto, 56, is president of the Santa Lidia distillery, one of many that rise from the lush cane fields around the city of Riberao Preto, about 175 miles northwest of Sao Paulo. Pinto said the Brazilian alcohol boom that began in the mid-1970s has “contributed enormously” to the prosperity of Riberao Preto. “It is a very rich city,” he said.

Distillery’s Revenues Soar

Alcohol has also made Pinto’s family business boom. Before 1975, the year the government-sponsored alcohol program began, Santa Lidia produced alcohol only as a byproduct of sugar. Since then, Santa Lidia’s alcohol production has multiplied nearly twentyfold and the company’s revenues have tripled, Pinto said.

More than 600 Brazilian distilleries, some of them so huge that they resemble small cities of stainless steel, produce enough fuel to keep 4 million cars running on pure alcohol. In addition, the country’s 5 million cars that still burn gasoline are fueled with a gasohol mixture that is 22% alcohol.

The original intent of the alcohol program was to save gasoline by putting all cars on gasohol, also known as “the cocktail.” In 1979 and 1980, when the second petroleum shock sent world oil prices to more than $30 a barrel, the program was modified to push pure alcohol fuel as well.

The government offered concessionary loans for the construction of distilleries and the planting of cane. Tax incentives encouraged the production of cars with alcohol-burning engines, which require higher compression and a special anti-corrosion treatment. Alcohol cars and fuel were retailed at attractively lower prices.

As a result, Brazil became the only country in the world to use alcohol fuel on a major scale. Since the mid-1970s, the country’s production of alcohol has increased more than tenfold, to 3 billion gallons a year.

Lead Pollution Gone

The alcohol program, officially named Proalcool, has eliminated lead pollution of the air because alcohol in gasoline increases octane without the need for tetraethyl lead. Exhaust from Brazil’s pure alcohol fuel, or hydrous ethanol, has less than half the carbon monoxide and hydrocarbons of gasoline exhaust.

In Sao Paulo, smog from vehicles has decreased measurably in the 1980s--to the extent that some species of birds, driven away by the city’s foul air, are returning.

Although alcohol fuel caused mechanical problems in cars early in the program, manufacturers have worked out the bugs. Anesio Moreira, a Sao Paulo taxi driver, said he has put 100,000 trouble-free miles on his 1986 Volkswagen.

“I have never even had the carburetor cleaned,” Moreira said.

The great disadvantage of alcohol as a motor fuel is its lower energy output. In Brazilian cars, it takes about one-fifth more alcohol than gasoline to make the same trip. But retail prices of alcohol, maintained by the government at only 69% of gasoline prices, more than compensate for this difference.

Alcohol Less Efficient

It costs Brazil about $45 to produce the amount of alcohol equivalent to a barrel of petroleum-based fuel. And while Brazil pours out 200,000 barrels of alcohol a day at that cost, it is forced to sell more than 100,000 barrels a day of gasoline at $17 or $18 a barrel, most of it to the United States.

The excess gasoline comes from the process of refining crude oil for the diesel fuel, lubricants and other petroleum products that the country needs. Brazil imports about half the crude that it uses.

As alcohol has expanded, concern has grown at Petrobras, the government-run oil company.

“It really made Petrobras uncomfortable when alcohol started taking a share of the market,” said Arnaldo Coelho, economic adviser to the association of Brazilian alcohol producers. “Petrobras began to counterattack, using all available means.”

Petrobras contends that if the use of alcohol continues to grow, the increasing amounts of excess gasoline will be impossible to sell. At the same time, Petrobras warns, its losses from marketing alcohol will grow increasingly burdensome. Petrobras has run up a $500-million deficit in its alcohol marketing account.

Crowded Off Market

Antonio Maciel, president of the Petrobras engineers association, said if alcohol continues to crowd gasoline off the market, five-sixths of the gasoline that Brazil refines will be unused in 1997.

“Something has to be done immediately for that disaster not to happen,” Maciel said.

Petrobras wants to stop the growth in alcohol by limiting the number of alcohol cars produced and reducing alcohol’s retail-price advantage over gasoline. The ideal production ratio, Petrobras contends, would be seven new gasoline cars for every three new alcohol cars.

But producers say the problems can be solved by adding alcohol to diesel fuel, which is used by virtually all the country’s trucks, and adding gasoline to alcohol fuel, creating “alcoline.” The anhydrous ethanol used as an additive in petroleum-based fuels is profitably priced, and the added profit would help finance hydrous alcohol fuel, the producers say. They say increased use of gasoline in alcohol would also help finance alcohol while creating a new market for excess gasoline.

Petrobras officials say increased costs and lower fuel efficiency make those solutions unrealistic.

Economy Doubted

Eli Roberto Pelin, an economist at the University of Sao Paulo who has studied Proalcool policy, said alcohol fuel will probably never be economically advantageous. If world petroleum prices rise beyond a certain level, gasoline can be replaced more economically by synthetic fuels made from coal or natural gas, Pelin said.

“That sets a limit, and the Arabs know that,” he said. As a result, he predicted, the limit on oil prices will always remain below the cost of producing alcohol fuel.

Nevertheless, Proalcool has grown politically powerful enough to guarantee its own survival, Pelin said. “To end it is simply not politically possible,” he said, so the most realistic alternative may be to scale down the program as much as possible.