Brazil Turns To Ethanol & Flex-Fuel Cars.

After Brazil's state-owned company Petrobras in October raised gasoline prices to keep up with the high cost of conventional crude oil, ethanol - or alcohol, as most Brazilians call it - began selling at half the price of gasoline at the pump. New flex-fuel cars like Volkswagen Fox can run on ethanol, which since the 1970s has been produced from sugar cane, or on gasoline.

Brazil began toying with the idea of non-gasoline-powered cars at the peak of the global oil crisis in the 1970s, as the then military dictatorship launched a campaign to reduce dependence on costly foreign oil. With the help of government subsidies and generous tax breaks, automakers designed and started manufacturing cars that ran exclusively on ethanol.

Sugar mills also benefited from the pro-alcohol campaign, getting the equivalent of millions of dollars in government subsidies to refine sugar cane into ethanol. The government no longer offers the subsidies, but demand serves as an incentive to keep making ethanol.

By the mid-1980s, ethanol-only cars accounted for almost 90% of all new-auto sales in Brazil. But a poor cane harvest and high sugar prices led to a shortage of ethanol in 1990, enraging motorists to migrate back to gasoline-powered cars.

Now, thanks to the emergence of flex-fuel engines, ethanol has made a comeback. According to Datagro, a Sao Paulo consulting firm which tracks the sugar and alcohol markets, ethanol consumption in Brazil is expected to rise by 4.08 million gallons to 3.58 billion gallons, or 13.6 billion litres, during the coming sugar-harvest season because of additional demand from flex-fuel cars.

The flex-fuel cars hit showrooms late last year and have been selling out in a hurry ever since. Lured by the low price of ethanol, Brazilians have already bought almost 220,000 of these vehicles in the first nine months of 2004, representing 24% of all new-car sales in the country. The number could jump to as high as 40% by early 2005, and eventually the Brazilian market will be dominated by flex-fuel vehicles.

Flex-fuel autos consume more than twice the amount of ethanol as alcohol-only vehicles, giving refinery owners an added incentive to keep producing fuel as well as sugar. The New York Times (NYT) recently quoted Plinio Nastari, Datagro's president, as saying: "The ethanol market here in Brazil was practically stagnant for more than a decade. Flex-fuel cars are changing that". He said another shortage is unlikely because the country now keeps a strategic ethanol stock for the off-season, when sugar is not harvested and ethanol is not produced.

What also sets flex-fuel autos apart from their ethanol-only predecessors, which are notoriously slow to warm up on cold days, is a small gasoline tank under the hood used to start the car in chilly weather. Once the engine is running, the car automatically switches back to ethanol or whatever is in the main tank.

On the road, most flex-fuel cars perform equally on ethanol or gasoline, though some, like the Ford Fiesta, have turned out to get slightly more horsepower when running on alcohol. The NYT quoted Luis Salem, general marketing manager in Brazil for Ford, as explaining: "It's not like you're using a source of energy that's worse in terms of performance... Actually, it's better".

Ford started selling flex-fuel versions of its Fiesta sedan and hatchback models last September. With oil prices hitting record highs recently, other countries are already expressing interest in importing flex-fuel technology from Brazil.

Volkswagen (VW) do Brazil, the first in Brazil to roll out the flex-fuel engine, introduced the TotalFlex Gol subcompact in March 2003. It has since served as host to delegations from Australia, Britain, China, India, Japan, South Africa and the US - all interested in its technology.

Fiat and the US auto giants General Motors and Ford Motor have followed suit, although VW still holds the biggest share of the flex-fuel market, with 36.5% of total sales. Renault and Peugeot are to bring out flex-fuel models for the Brazilian market before end-2004.

It should not be surprising that, in a few years, if all new cars in Brazil were equipped with flex-fuel engines. Demand is only going to increase, especially if conventional oil and gasoline prices remain high, and it is already clear that consumers like the product.

It will probably take years before Brazil becomes a major exporter of flex-fuel cars. Few countries have an ethanol fuel industry and distribution system as advanced as those in Brazil.

A fuel mix of 85% ethanol and 15% gasoline, known as E85, is available in at least 22 states of the US, mainly Minnesota and Midwestern states. But this fuel is still hard to find at the pump in most other parts of the US.

In Brazil, by contrast, ethanol is available at almost every service station. It may take a while until the flex-fuel technology is used in other countries.