Why does the price of ethanol rise with the rise in oil prices?
5 min read
Rewarming the global economy after the pandemic and now War in Ukraine, invaded by RussiaPut the oil in a bullish cycle. The price of a barrel jumped from $60 before the outbreak of the Corona virus to prices above $100 at the beginning of the year. These modifications from abroad make petroleum-derived gasoline and diesel more expensive. But also ethanol produced within the country and from sugar cane. Why does this happen?
According to economists, ethanol follows the price of oil because it competes with gasoline. Since a significant part of the car fleet is flexible, drivers can choose one or another type of fuel in accordance with the prices.
Therefore, when the price of gasoline rises, consumers look for ethanol, which begins to sell more. As the sale of ethanol increases, producers can raise the price charged by service stations. In turn, gas stations raise prices for consumers.
The determining factor in determining the price of ethanol at the pump is the price of gasoline. If we make a correlation between the price of regular gasoline and hydro ethanol at the pumps between January 2013 and last week, we would have an almost perfect correlation of 0.97. In other words, the price of ethanol rises or falls in practically the same proportion as the rise or fall of the price of gasoline.
Eric Gil Dantas is an economist at the Petrobras Social Observatory and the Brazilian Institute for Political and Social Studies (IBES).
See below for fuel price changes
Cumulative increase in the 12 months through February
- Ethanol: +36.17%
- Gasoline: +32.62%
- Diesel: +40.54%
- Composites Gas (CNG): +38.41%
- IPCA (official inflation): +10.54%
(Source: IBGE)
The difference in one year to March of the average price
- hydrated ethanol: +17.43%
- Regular Gasoline: +25.23%
- Diesel: +42.90%
- Composites Gas (CNG): +44.36%
(Source: ANP)
In the last harvest, Brazil produced 28 billion liters of ethanol, 39.3% anhydrous and 60.7% water. Ethanol accounts for 45% of fuel consumption among light vehicles in Brazil.
- moist: Sold directly to drivers, it has a higher water additive, hence the name.
- anhydrous: Ethanol added to Gasoline A by 27% (since March 2015). The result is the so-called regular gasoline.
Why does ethanol rise in oil?
First of all, it is necessary to understand why gasoline, diesel and vehicle gas (CNG) fluctuate according to the price of oil in the international market, since Brazil already extracts enough oil for domestic consumption For more than 15 years. There are two main reasons:
- Pricing Policy Petrobras: The government-controlled company is the largest oil exploration company in Brazil, accounting for about 75% of domestic production. main company from 13 From 18 Refineries and Practices in Country A Pricing Policy This resets fuel in Brazil according to the quotations applicable in the international market. Prices are in dollars, so the difference in US currency also affects the price of fuel.
- Oil refining: 14 of the 18 old Brazilian refineries, dating from before the 1980s, were built to process imported oil, a light product. The oil produced in Brazil is of the heavy type. Thus, the country needs to import oil to make a mixture that can be efficiently processed in refineries.
The determining factor in the price of ethanol at the pumps is the price of gasoline, says Antonio de Padua Rodriguez, Technical Director of Unica (Confederation of the Sugar Cane Industry). Therefore, if the oil rises, it takes gasoline and ethanol with it.
The higher the gasoline, the more ethanol there will be. And when the gasoline goes down, the ethanol producer can’t sell if he doesn’t lower the price as well. The consumer is the great price maker in this market.
Antonio de Padua Rodriguez, Director Just
The price of sugar affects too
According to Rodrigues, a third of the factories in the country are devoted exclusively to the production of ethanol. The rest has the potential to produce both ethanol and sugar, as the entrepreneur decides.
This is why the price of sugar also influences the producer’s decision to process more or less cane to produce ethanol.
According to data from Conab (Companhia Nacional de Abastecimento), 88% of the Brazilian ethanol in this crop will come from sugarcane and 12% will come from corn.
When the international price of sugar is higher than the price of ethanol, the percentage of sugarcane devoted to ethanol decreases, and the share of sugar increases. In the case of the 2020/2021 harvest, for example, the mix up Sugar production increased from 35% to 46%.
In the last harvest, sugarcane production was affected by the weather, with periods of drought and frost, which reduced the supply in the sector by 16% compared to the previous harvest. The less sugarcane is produced, the less ethanol is supplied, which ends up affecting the price of the product.
But all this is valid only for an initial period of harvest, according to Rodriguez. In addition, he says, the price of sugar on the international market also depends on Brazilian production, the world’s largest supplier of the product.
Can ethanol be separated from oil?
Brazil could lower the price link between ethanol and oil if it adopts a policy of encouraging renewable fuels, say energy experts and entrepreneurs in the sector.
In their opinion, it wouldn’t be a matter of going back in time Pro-alcoholwhich was created in the 1970s to reduce Brazil’s dependence on oil, after the high prices caused by conflicts in the Middle East, and mainly, by the creation of the Organization of Petroleum Exporting Countries (OPEC) in the past decade.
Experts say Proálcool has lost its original meaning because half a century ago Brazil no longer relied on oil. But programs to encourage renewable fuels must be part of government policy, because the global energy matrix is changing and because of the need to reduce the environmental impact of economic activities.
Some say Proálcool was too expensive. But what is the cost of investing in policies that reduce dependence on oil and, at the same time, shape our leadership in fuels with lower carbon emissions?
Ricardo Ballestero, Management Course Coordinator at the Instituto Mauá de Tecnologia (IMT)
We need to resume Proálcool, clearly in a new way, so that it does not fluctuate according to the crises of the world.
Paulo Feldman, Professor at FEA-USP
How to increase ethanol production
Specialists point out that Brazil has shouldered the obligation, by Renovabioto increase ethanol production from 30 billion liters currently to about 50 billion liters and triple biodiesel production to 13 billion liters by 2030.
Such expansion can be achieved through policies that provide, for example, a minimum price guarantee for producers, financing lines for infrastructure investments and expansion of distribution logistics.
Since the start of Proálcool, we have already increased ethanol production by 55 times. This is important for the country’s energy security. There is also the environmental issue, as biofuels emit less carbon and could be another component of the energy transition.
Eric Gil Dantas, Economist at Petrobras Social Observatory and IPS
Entrepreneurs and experts criticize specific measures, such as those Reduce ICMS on fuelbecause it benefits fossil fuels rather than long-term programs focused on renewable energy sources.
When you talk about taxing fossil fuels, the government is actually penalizing renewable fuels.
Antonio de Baidoa Rodriguez, Director of UNICA
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