UtilityMinimization

I have a request to look at Brazil’s ethanol fuel program, which, on the surface, seems unequivocally more successful than the US endeavors. In the US, ethanol is made from corn and large government subsidies. I cover some reasons for the current failure in this article. In Brazil, ethanol fuel is made from sugar cane, which is cheaper to grow than corn.

Brazil’s ethanol program began, not out of concern for the environment, but rather as a market response to the oil shocks of the 1970s. As gasoline prices reached all-time highs (and in real terms, still the all-time highs) in the late 70s and into the 1980s, Brazil began to look for alternatives to petroleum based fuels. Because they were the largest producer of sugar in the world, they figured that turning sugar into alcohol would be a good way to go. It also helped that at the time, sugar had a relatively low market value, so the chief input good was cheap. The program took off, and by 1986 about 75 percent of all new cars sold in Brazil were equipped to burn ethanol instead of gasoline.

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Gas prices are high, and we still need/want to drive a lot of places. This combination has us looking at alternative methods of fueling our vehicles. One method that has started to catch on is hybrid gas/electric cars, such as the Toyota Prius. These vehicles use gravity to charge a battery that assists the gasoline engine and reduce fuel consumption. Unfortunately, some studies show that these vehicles do not use any less fuel, and the battery is mostly used to give the vehicle more power. Since that is what the market really craves, auto manufacturers are only too happy to oblige.

A second ‘alternative’ method is the use of ethanol fuels made from corn. Since this is not a new technology, people schooled in economics should be extremely wary of such a solution. The reason is simple: if we could have used ethanol fuels all along, why have we stuck with gasoline? The likely answer is that ethanol, in the end, is still more expensive than gasoline. When, and if, gasoline becomes more scarce, that relationship may change, but the current incarnation of ethanol fuel, E-85, which is a blend of 85 percent ethanol and 15 percent gasoline, has yet to catch on. Let’s explore some of the reasons why.

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