BRAZIL: Homegrown Fuel Supply Helps Drivers Breathe Easy

SAO PAULO, Brazil - While Americans
fume at high gasoline prices, Carolina Rossini is the essence of Brazilian cool
at the pump.

Like tens of thousands of her countrymen, she is running her
zippy red Fiat on pure ethanol extracted from Brazilian sugar cane. On a recent
morning in Brazil's largest city, the clear liquid was selling for less than
half the price of gasoline, a sweet deal for the 26-year-old lawyer.

"You save money and you don't pollute as
much," said Rossini, who paid about $18 to fill her nearly empty tank. "And it's
a good thing that the product is made here."

Three decades after the
first oil shock rocked its economy, Brazil has nearly shaken its dependence on
foreign oil. More vulnerable than even the United States when the 1973 Middle
East oil embargo sent gas prices soaring, Brazil vowed to kick its import habit.
Now the country that once relied on outsiders to supply 80% of its crude is
projected to be self-sufficient within a few years.

Developing its own
oil reserves was crucial to Brazil's long-term strategy. Its domestic petroleum
production has increased sevenfold since 1980. But the Western Hemisphere's
second-largest economy also has embraced renewable energy with a
vengeance.

Today about 40% of all the fuel that Brazilians pump into
their vehicles is ethanol, known here as alcohol, compared with about 3% in the
United States. No other nation is using ethanol on such a vast scale. The change
wasn't easy or cheap. But 30 years later, Brazil is reaping the return on its
investment in energy security while the U.S. writes checks for $50-a-barrel
foreign oil.

"Brazil showed it can be done, but it takes commitment and
leadership," said Roland Hwang, vehicles policy director for the Natural
Resources Defense Council in San Francisco. In the U.S. "we're paying the
highest prices at the pump since 1981, and we are sending over $100 billion
overseas a year to import oil instead of keeping that money in the United
States.... Clearly Brazil has something to teach us."

Much of Brazil's
ethanol usage stems from a government mandate requiring all gasoline to contain
25% alcohol. Vehicles that ran solely on ethanol fell out of favor here in the
1990s because of an alcohol shortage that pushed drivers back to gas-powered
cars. But thanks to a new generation of vehicles that can run on gasoline,
ethanol or any combination of those two fuels, more motorists like Rossini are
filling up with 100% alcohol again to beat high gas prices.

The exploding
popularity of these so-called flex-fuel vehicles is reverberating across
Brazil's farming sector. Private investors are channeling billions of dollars
into sugar and alcohol production, creating much-needed jobs in the countryside.
Environmentalists support the expansion of this clean, renewable fuel that has
helped improve air quality in Brazil's cities. Consumers are tickled to have a
choice at the filling station.

Officials from other nations are flocking
to Brazil to examine its methods. Most will find Brazil's sugar-fuel strategy
impossible to replicate. Few countries possess the acreage and climate needed to
produce sugar cane in gargantuan quantities, much less the infrastructure to get
it to the pump.

Still, some Brazilians said their government's commitment
to ditching imports and to jump-starting homegrown energy industries were the
real keys to Brazil's success.

"It's a combination of strong public
policy and the free market," said Mauricio Tolmasquim, president of a federal
energy research agency based in Rio de Janeiro. "That's the Brazilian
secret."

Brazil's fortunes have been tied to sugar since the Portuguese
conquerors found that their tropical colony boasted ideal conditions for
cultivating the tall, grassy plant. Brazilians produce and eat more cane sugar
than any people on the planet, so the notion of using it to power their vehicles
was a natural. After all, Henry Ford once viewed ethanol, which can be made from
corn, barley and other crops, as a strong contender to fuel the Model
T.

But the discovery of cheap, abundant petroleum changed everything.
Like much of the rest of the world, Brazil guzzled imported crude until the
1970s oil shocks put its economy over a barrel. So totally reliant was Brazil on
foreign oil that surging prices wreaked havoc on its balance of trade. That led
to massive borrowing, huge deficits and, eventually, hyperinflation and a
devaluation of its currency.

Thus the Brazilian government, then a
military dictatorship, launched efforts in the mid-1970s to wean the nation off
imports. Those efforts included its National Alcohol Program, known as
Proalcool.

"To become less dependent was a matter of life and death,"
said Jose Goldemberg, secretary of the environment for the state of Sao
Paulo.

With the help of public subsidies and tax breaks, farmers planted
more sugar cane, investors built distilleries to convert the crop to ethanol and
automakers designed cars to run on 100% alcohol. The government financed a
mammoth distribution network to get the fuel to gas stations and kept alcohol
prices low to entice consumers. It worked. By the mid-1980s, virtually all new
cars sold in Brazil ran exclusively on ethanol.

But a 1989 shortage
coupled with low gas prices soured many on the renewable fuel. Sales of
alcohol-only cars tumbled in the 1990s, and the government gradually withdrew
its subsidies and lifted price controls on ethanol. Demand stalled.

Some
critics at the time chalked it up to the inevitable consequences of government
meddling. But today many laud Brazil's Proalcool program for creating a viable
domestic market for ethanol, and for spawning an industry with tremendous export
potential that now employs more than 1 million Brazilians.

Meanwhile,
ethanol remains little more than a boutique fuel in the United States. Although
the U.S. is the world's second-largest ethanol maker, producing 3.4 billion
gallons last year compared with around 4 billion gallons for Brazil, ethanol's
main use is as a gasoline oxygenate to boost air quality rather than as a
serious replacement for foreign oil. However, high gas prices have some farm
belt legislators pushing Congress to mandate greater use of domestic corn-based
ethanol in the nation's fuel supply to reduce oil consumption.

Virtually
all cars sold in the U.S. since the early 1980s can run on gasoline containing
as much as 10% ethanol. In addition, there are an estimated 5 million flex-fuel
vehicles already on U.S. roads that can burn a mixture as high as 85% ethanol.
But big logistical and political hurdles remain. Only a few hundred of the
nation's approximately 169,000 retail gas stations are equipped to sell
so-called E85 fuel. Nationwide distribution would require station owners to
invest hundreds of millions of dollars in special tanks and
pumps.

Although U.S. ethanol makers say they could easily double their
output to meet any increase in demand, experts say that's still a drop in the
bucket compared with the tens of billions of gallons that would be needed
annually to displace meaningful amounts of oil. The U.S. industry is loath to
give up tariffs that protect it from cheaper alcohol from
Brazil.

Meanwhile, some environmentalists say feedstock such as grasses
and municipal waste offer much more promise than corn. But huge investments in
research are needed to get the costs down for this so-called cellulosic
ethanol.

What most can agree on is that Brazil is an example of what
might have been if America had seriously committed itself 30 years ago to
renewable energy.

"If we would have spent one-hundredth of the money that
we have spent to send tanks around the world to protect our oil supplies ... we
would already be using cellulosic ethanol," said Michael Bryan, chief executive
of BBI International, a Colorado-based bio-fuels consulting
company.

Although public support was crucial in getting Brazil's program
up and running, the private sector is now driving growth with flex-fuel
cars.

At Volkswagen's sprawling Anchieta plant near Sao Paulo, the
gleaming Fox and Polo models inching down the assembly line look just like
regular cars. The only immediate clue that they are revolutionizing the
Brazilian auto market is the TotalFlex logos on their back
windshields.

The company was the first to unveil dual-fuel vehicles in
Brazil in March 2003. The technology has proven to be such a hit with consumers
that in a little more than two years the company has shifted nearly 90% of its
domestic production to flex-fuel capability.

"It was a big bang in the
market," Volkswagen spokeswoman Junia Nogueira de Sa said.

Equipped with
a single fuel system, these vehicles employ sensors that allow the engine to
adjust to gasoline and alcohol in any combination. Flex-fuel vehicles don't cost
any more than regular gasoline-powered models. The only visible difference under
the hood is a tiny auxiliary fuel tank that holds a bit of gasoline to aid
starting on cold days, a common problem with the old alcohol-only
models.

Today, a half dozen carmakers, including General Motors Corp. and
Ford Motor Co., offer dual-fuel versions of their vehicles in Brazil, and more
are on the way. Consumers bought around 48,000 of the vehicles the first year
they were available in 2003, representing about 4% of total car sales. That
figure quickly jumped to 328,000 cars, or 22% of the total volume, in 2004, and
last month nearly half of the new cars sold were flex vehicles. Analysts predict
that dual-fuel technology will easily dominate the market within a few
years.

Cars aren't the only things being powered by ethanol in Brazil.
Small planes such as crop-dusters are converting to alcohol. And Brazil's
electrical grid, which experienced a severe shortage in 2001 because of a
drought in its vital hydroelectric sector, is getting a charge from
sugar.

In contrast to U.S. corn-based ethanol, which requires substantial
amounts of fossil fuel to plant, harvest and distill, Brazil's industry uses
crushed sugar cane stalks known as bagasse to feed the steam boilers that power
its mills and distilleries. The process is environmentally friendly and so
efficient that these centers are generating more energy than they can use.
Ethanol producers are supplying Brazil's grid with more than 600 megawatts of
electricity. The near-term potential is at least 10 times that.

Near the
city of Ribeirao Preto in northeastern Sao Paulo state, the harvest is underway
in Brazil's richest sugar-cane-producing region. Trucks lumbering under mounds
of fresh-cut cane creep into Jardest Sugar & Alcohol. The vast milling and
distilling complex, owned by Brazilian sugar trading giant Crystalsev, will run
24 hours a day nonstop until the season ends in December. The air is fetid with
char from the fires that are clearing the fields of debris and vermin in
preparation for the arrival of teams of scythe-wielding cutters. A lush emerald
sea of cane rolls toward the horizon in every direction.

And there is a
lot more where that came from. Brazil has about 13.5 million acres planted with
sugar cane. More than 200 million dormant acres lie ready to
cultivate.

"Oil is running out. The world needs more clean, renewable
fuel," Crystalsev executive Maurilio Biagi Filho said. "And we are going to be
there to supply it."