Brazilian Ethanol Backgrounder

Here’s the background on the ethanol spat between Venezuelan President Hugo Chavez and Brazilian President Lula da Silva going on at the South American energy summit being held this week.

Brazil is a major importer of Bolivian natural gas. About a year ago, Bolivian President Evo Morales, a Hugo Chavez lackey, nationalized his country’s natural gas industry. Morales demanded that all foreign natural gas companies operating in Bolivia, including Brazil's government-owned energy company, renegotiate their existing contracts with terms more favorable to Bolivia. This sudden action led Brazil to realize that an over-dependence on energy controlled by Hugo Chavez and his clients was not in the Brazilian national interest, and President da Silva's government began work on an ethanol cooperation pact with a country outside of the Chavez sphere of influence, i.e. the United States. Agreement on a pact was announced in March.

Since control of natural energy resources is the only international bargaining chip that Chavez has (without oil, his place on the international stage would be exactly that of Cuba’s), Chavez is desperately trying to stop alternatives to oil from being developed. Without high oil prices to pay for Chavez’s subsidies to Venezuela’s poor, it will become obvious to everyone but anti-American ideologues that Chavez’s “Bolivaran revolution” has been a failure.

Chavez will now try a two-pronged strategy. 1) Try to flood Brazil and other Latin American countries with cheap oil to stave off the demand for ethanol. However, Brazil won’t buy into this plan, after the experience with Morales in Bolivia. Plus Chavez can only make the price so low, before he loses the money he needs to subsidize Venezuela’s dead non-petroleum economy. 2) Try to scare people into thinking that increased ethanol production will cause food shortages and demand the governments ban the production of ethanol as a fuel. Translation: We can never have any new technological developments again, because the resources used to produce them might drive up the price of something we already have.

The United States should cement its commitment to the energy pact with Brazil by immediately dropping its 54-cent-per-gallon import tariff on Brazilian ethanol.