Mind the gap: Brazil’s looming transport fuel shortage

For decades, Brazil has sought energy security by growing its domestic light-vehicle fuel supply, largely through the promotion of sugarcane ethanol. Still, in the past two years, the nation’s ethanol plants have operated below capacity as the country has imported greater quantities of gasoline. In the longer term, assuming Brazil’s economy returns to stronger growth, circumstances are poised to change. Bloomberg New Energy Finance examines the 10-year supply and demand outlook for light-vehicle fuel and finds:

● Assuming Brazil’s economy returns to strong growth, the country’s demand for light-vehicle fuel will exceed its domestic supply by a minimum of 9bn litres of gasoline or 12bn litres of anhydrous ethanol per year by 2021.

● The coming imbalance will be caused by a confluence of factors:
o An expected near doubling in demand for light-vehicle fuels by 2021;
o The prioritisation of diesel production over gasoline refining by state-owned oil company Petrobras;
o Just 2.4bn litres of new ethanol capacity currently under development and expected online by 2016.

● Brazil policymakers have three main options to alter this long-term path:
o Raise the cap on gasoline prices for consumers – in turn, this will allow ethanol prices to rise and give producers an incentive to build new capacity;
o Boost the mandate for the amount of anhydrous blended in a typical litre of gasoline from the current 20% to 25%, to improve producers’ margins.
o Eliminate the $0.06 per litre of hydrous ethanol taxes.

● We anticipate the government will make these moves in the coming year. Gasoline prices were pushed up by 6.6% in January and we expect another increase towards the end of the year. The government will also adjust the blending mandate in Q2 2013 and eliminate or substantially decrease hydrous ethanol taxes.

● To meet all Brazil’s light fuel demand locally, the sugarcane sector must operate at 90% capacity between 2013 and 2016. Sugarcane producers must also heavily prioritize ethanol production over sugar, which they have not always done in the past.

● All of the above will be called into question if the Brazil economy fails to return to the strong growth rates seen prior to 2012. The supply and demand imbalance could also prove less than anticipated if Brazil makes unexpectedly strong progress in improving the overall energy-consumption efficiency of its vehicle fleet.

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