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A Fresh Approach to US Energy Security and Alternative Fuels:
The Western Hemisphere and the Ethanol Option

By Annette Hester
Research Associate and Fellow at the Centre for International Governance Innovation,
Waterloo, Ontario, Canada

There are good reasons for the heightened preoccupation with energy security in the US.  Over the last twenty years oil consumption has increased steadily while domestic production has gone in the opposite direction. Today, Americans consume almost 21 million barrels a day, but produce only 5.3 mbl/d. Meanwhile the rest of the world is also increasing consumption, especially China, which went from a small oil surplus in the 1980s to importing 35 percent of total consumption today.

The competition for scarce petroleum resources has led to a spiral in oil prices, from an average US$30/barrel in 2003 to US$66/barrel last year. Given that almost half of US oil consumption is dedicated to motor vehicles(1), a focus on promoting alternative motor fuel sources makes sense.  Most of the attention, in the form of increased incentives for domestic production, has been directed to biofuels, particularly ethanol.

But while the current push for an accelerated increase in domestic ethanol production has undoubtedly impacted the ethanol and agriculture markets, the effect on energy security has been negligible. The fact is, in order to increase energy security and meet the concerns raised in many quarters about the impact of ethanol on agricultural production and the environment, the proper response should involve forging new technological and trade relationships in the Western Hemisphere, particularly with Brazil and Canada.

The single-minded preoccupation with U.S. dependency for energy on the Middle East further muddies the picture.  In 2005, when the US imported 13.52 mmb/d(2), three of the top five providers to the US were in the Western Hemisphere, one was in Africa, and only one was in the Middle East. Together these five accounted for 59 percent of all imports.  Canada, Mexico and Venezuela together were responsible for 2/3 of that total.

Canada and Mexico, America’s neighbours, are the crucial players.  Canada is expected to substantially increase its oil production over the next decades, but Mexico will have a hard time supplying even its own needs ten years from now. As for Venezuela, the country’s future as an oil supplier to the US is as uncertain as the whims of its mercurial leader Hugo Chavez. Still, Canada will have to overcome two huge technological barriers in order to deliver this incremental production:  it will need to extract and upgrade oil out of bituminous sand without using other costly hydrocarbons (namely natural gas) as an input, and find ways to moderate the environmental impacts of the whole process which now spews tonnes of CO2 into the atmosphere.

Meanwhile, Brazil has learned a lesson or two about energy security and environmental sustainability. The country now relies on one of the world’s most diversified energy resource bases.  Renewable sources account for 40 percent of total energy use (compared to the world average of 14 percent). In 2006 the country became self sufficient in oil production, chiefly because sugar cane ethanol accounts for 40 percent of the domestic transportation market. Until last year, when the US inched ahead, Brazil was the world’s largest ethanol producer. And thanks to Flex Fuel vehicles, which are capable of handling gasoline and ethanol in any combination, a transportation and distribution infrastructure ready to  deliver product to consumers, as well as a mandated blending of 20 to 25 percent ethanol in all gasoline, Brazil remains the world’s largest ethanol consumer.

But it took Brazil decades to get there. In the 1970s, when the first big ethanol program was introduced as a response to the sharp increase in oil prices, consumers abandoned the product in droves as soon as the prices fell. Smartly, Brazilian government and industry turned this challenge into an opportunity. The government withdrew its subsidies, and together with industry, invested in targeted research aimed at making the product economically viable and environmentally sustainable. Today, the fuel is produced from over 500 cane varieties without irrigation; the feedstock is used to produce either sugar or ethanol; and in both cases, byproducts are used to generate heat and power in mills that can be re-tooled to manufacture either sugar or ethanol.  The result: Brazil’s ethanol is now the cheapest biofuel in the world (equivalent to US$35 to $50 per barrel of oil)(3).

Meanwhile the US woke up to the potential of ethanol in its cornfields. However, unlike sugar cane product, corn-based ethanol is not as economical or as environmentally friendly. Yet thanks to a generous combination of subsidies, mandated use, and import barriers, domestic ethanol production doubled from 2 billion gallons in 2002 to almost 4 billion in 2005. Last year production jumped again to approximately 5 bbg. The effects of this accelerated increase have already been felt by agriculture and food markets, leading to a widespread acknowledgment that the competition between food and fuel is not a solution. Consequently, the push to find a way to produce ethanol from cellulosic feedstock is on.

Canadian and American companies are vying for the substantial grants and loan guaranties now available, and for the billions that are sure to come to speed up the economic commercialization of cellulosic ethanol. Unfortunately, to date, everyone – US, Canada, and Brazil – is operating in silos. This is akin to saying that energy security can be delivered by rewarding isolation. It can’t. The coming negotiations about a cooperation agreement between the US and Brazil on the development of biofuels in the hemisphere represent a good starting point.  However, in order for these negotiations to be more than smoke and mirrors, industry, researchers, policy makers, and lobby groups in all three countries need to acknowledge that joining forces to develop and apply new technologies represents the best and most lucrative solution. The sooner such cooperation results in the delivery of the most environmentally friendly ethanol to the largest number of people, the sooner we will achieve real energy security.

Note that 2005 was used as a base year as it followed the trend of the previous five years.

Masami Kojima and Todd Johnson, “Potential for Biofuels for Transportation in Developing Countries, Energy Sector Management Assistance Programme, World Bank, October 2005.

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