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May 9, 2011

Fuel Demand Outpaces Ethanol and Gasoline Production in Brazil

The production of ethanol and gasoline in Brazil has not been able to keep pace with the rapid increase in the domestic demand for fuel forcing Petrobras to increase their importation of both fuels, at least temporarily. The temporary shortage of both fuels has two causes. The primary cause is that ethanol production in Brazil drops to near zero during the time between sugarcane harvests, which is the January to March period. Due the lack of adequate storage capacity for ethanol in Brazil, supplies become very tight during this period and prices spike. The high cost of ethanol then causes owners of flex fuel vehicles to switch to gasoline because it is more economical than high priced E100, thus resulting in potential gasoline shortages as well.

The secondary cause of the shortages is the general overall increase in the Brazilian economy which drives up demand for many products not just fuel.

During the first two months of 2011, gasoline consumption in Brazil increased 15% to 20% due to high ethanol prices. During the month of February, the average price of ethanol in Brazil was R$ 1.89 per liter (US$ 4.48 per gallon), but it spiked to R$ 2.32 per liter (US$ 5.50 per gallon) during April. In April, the price of ethanol at the pumps in Sao Paulo increased 10.3% while the prices of gasoline increased 6.6%.

The entire situation is expected to return to more normal levels during the month of May as the sugarcane harvest resumes and supplies of ethanol return to more normal levels, but in the meantime Petrobras has had to import both gasoline and ethanol to supply the domestic market. In fact, as the Brazilian sugarcane harvest picks up steam, the availability of ethanol in the market has increased and ethanol prices at the wholesale level have started to decline. According to the Brazilian Sugar and Alcohol Company (CBAA), the wholesale price of ethanol has fallen to R$ 1.10 per liter which should soon translate to R$ 1.50 to 1.60 per liter at the pump.

According to the Minister of Mines and Energy, one of the goals of the Brazilian government is to increase Petrobras's production of ethanol. Currently, Petrobras produces about 5% of Brazil's ethanol and the goal is to increase that to 15% within four years. As Petrobras increases its production of ethanol, it is expected to help smooth out the supply/demand curve resulting in more stable prices.

As a way to stimulate ethanol production in Brazil, the domestic price of gasoline has always been elevated in Brazil. As long as gasoline prices are high, ethanol production remains profitable. The price of gasoline produced at Brazilian refineries has been unchanged for 9 years.