Monday, April 30, 2012

Argentina oil grab fuels Brazil’s biodiesel confusion

Possibly the last unexplored angle on Argentina’s abrupt nationalization of oil company YPF that snatches the stake held by Spain’s Repsol – a perpetuation of the confusion over Brazil's potentially lucrative but currently struggling biodiesel industry.

Spain is hot and bothered that its flagship energy company is not going to get anything near what it wants in compensation for the takeover. So among the few response measures it has to chase after a country still overshadowed by its massive debt default is to slash purchases of Argentine soy-based biodiesel. Spain buys that fuel from Argentina, the world’s top biodiesel exporter, to meet mandated fuel blending requirements.

Brazil is jumping to the rescue. Its incipient biodiesel program is seeking to replicate the success of the sugar cane ethanol industry that now provides about half the fuel for the country’s growing fleet of cars. What could be better for a nascent industry than the promise of a huge new market?

This is where things get confusing. The industry already has a huge new market, it’s called Brazil. But the government has restricted the growth in the domestic market because it’s worried that rapid expansion of soy-based biodiesel will reduce grain available for consumption by humans (OK, let’s be realistic, consumption by animals that are later consumed by humans), which risks pushing up food prices. Ah, the old food vs. fuel debate (I’ll skip my customary diatribe about this intellectual pissing match). The industry has for months been pushing the government to raise the mandatory biodiesel blend in fossil diesel from the current 5 percent to the 15 or 20 percent that the industry hoped for when it launched its wave of investments.

Now Brazil's industry has its eyes on Spain, hoping to fill the void left by Argentina, and the government seems keen to help them. Authorities have already approved a handful of export licenses.

I have to admit, I don’t get it. Yes, Spain’s a great market and Argentina’s doctrinaire stupidity is handing it to them, but there’s rarely a better market than the one in your backyard. Brazil’s is an obvious one not just because of its size, but also because most of its products are hauled by trucks along poorly paved roads – which means it has a huge demand for diesel. The whole point of creating the biodiesel program to begin with was the reduce diesel imports.

Sure, Brazil could get some additional export revenue from sending biofuel to Europe, which would help improve its trade balance. But whatever biodiesel is exported will have to be made up for at home with fossil diesel produced or imported by Petrobras. Robbing Peter to pay Paul.

So in other words, if food vs. fuels is a concern for boosting domestic use of biodiesel, why isn’t there similar concern over exporting the same fuel? 

BTW, hat tip to @viasimonromero.

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