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May 27, 2014

Biodiesel in Brazil will Increase to 7% Vegetable Oil by end of 2014

President Rousseff is scheduled to announce on Wednesday that Brazil will increase the percentage of vegetable oil in biodiesel from the current 5% (B5) to 6% (B6) starting in July and then to 7% (B7) in November of this year.

The increase in the percentage of vegetable oil in biodiesel will allow Petrobras to reduce its imports of petroleum diesel and it should also give additional incentives to increase soybean production since soybean oil represents 80% of the vegetable oil used to produce biodiesel.

Brazilian biodiesel producers have indicated for several years that they had idle capacity and that they could greatly increase biodiesel production, but the Brazilian Treasure Secretary resisted the increase auguring that it would increase inflationary pressures. Inflation has become a hot issue in Brazilian politics especially now during the run-up to presidential elections in October.

An economic advisor to the Brazilian Vegetable Oil Producers Association Leonardo Zilio welcomed the news of the increase and discounted the fear that increasing the mixture of vegetable oil in biodiesel would result in more inflation. He pointed out that a study conducted by the Fundacao Getulio Vargas (FGV) in 2012 indicated that an increased use of vegetable oil in biodiesel would result in less than a 20 cent increase in the monthly food basket in Brazil (cesta basica) a less than a 1 cent increase in the average bus ticket.

Since the study was conducted, the price of soybean oil had declined and the price of petroleum diesel has increased resulting in only half the inflationary pressure now as compared to when the study was conducted in 2012.

The state run company Petrobras must import all the petroleum diesel consumed in Brazil and it imports the diesel at prices higher than what it sells the fuel to Brazilian consumers. As a result, Petrobras loses money on these imports, but once again the price of diesel is held down artificially in Brazil in order to combat inflation. With more vegetable oil used in the mixture, Petrobras could reduce some of its petroleum diesel imports and thus loose less money.

During the year 2015 when the 7% (B7) mixture will be in place for the entire year, it is estimated that Petrobras will be able to cut its imports of petroleum diesel by 10% compared to the level of imports in 2013.

Increasing the percentage of vegetable oil in biodiesel has environmental advantages as well. Studies have shown that pollution from diesel engines is greatly reduced when vegetable oil is mixed with petroleum diesel.