Gasoline vs. Ethanol in Brazil: Why Biofuel Is Winning the Price Battle

Hydrous ethanol has become more competitive against gasoline in Brazil as prices continued to fall in the second week of May, driven by the sugarcane harvest in the country's Center-South region.

According to data analyzed by fleet management firm Veloe, the price ratio between ethanol and gasoline dropped to 69.7% in early May, down from 71.7% in late April. This falls below the critical 70% threshold typically used by owners of flex-fuel vehicles to determine the economic advantage of biofuel over fossil fuels.

A flex fuel car is basically a vehicle whose motor is made so it can run on ethanol, on gasoline, or on some blend of both, and honestly in any proportion. The real little “secret” behind this whole thing is the electronic control unit, also called the injection module. It can identify what fuel is being used and then it automatically tweaks the engine settings, so it aims for the best performance and efficiency. The world’s first mass-produced flex-fuel car was launched in Brazil in 2003: the Volkswagen Gol Total Flex 1.6. From that milestone, this know how spread pretty fast, picking up popularity among the big automakers that are already established in the country. Today, this type of vehicle can be seen everywhere in Brazil.

ETHANOL VS. GASOLINE COMPETITIVENESS

The deepening decline in ethanol prices, which began in mid-April, contrasts with the more moderate price adjustments seen in other fuels:

• Gasoline: Dropped 0.27% to an average of 6.76 reais per liter.
• S-10 Diesel: Decreased 1.27% to an average of 7.21 reais per liter.

"The market is closely monitoring the evolution of the harvest, alongside factors such as global oil prices, exchange rates, and the production mix between sugar and ethanol," Veloe, a subsidiary of Elopar (controlled by Banco do Brasil and Bradesco), said in a statement.

REGIONAL PRICE DROPS

The sharpest absolute price drops for ethanol were concentrated in Brazil's agricultural heartland, reflecting the impact of the ongoing harvest:

• Goiás: -4.9%
• São Paulo: -4.7%
• Federal District: -4.6%
• Minas Gerais: -4.2%
• Mato Grosso: -4.1%

Analysts suggest that the increased supply from the Center-South harvest is the primary driver behind these regional declines, providing relief to consumers and improving the biofuels' market share.

Increasing sales of electric cars in Europe lead Volkswagen to shift its combustion engine production to Brazil and Argentina

Motivated by the wave of electrification of European cars, Volkswagen decided to transfer part of its production of combustion engines from Germany to factories in San Carlos, in the state of Sao Paulo, Brazil, and Cordoba, Argentina, where the electric car segment still crawling, according to Pablo Di Si, president of the automaker for South America.

This shows that while the global automotive industry is going towards its "electrification", Brazil's automotive market still has few electric car models. There are currently 4 electric models and some hybrids. This means that the Brazilian market will lag behind the industry's technological innovations for some time.

Thus, we will continue driving excessively expensive cars that pollute the environment for years to come.

Insolvency remains high among Brazilian consumers

Two years ago, Brazilian financial institutions were forced by the Central Bank of the country to reduce the time that left consumers rolling the debt on the credit card. This measure aimed to reduce the level of default among Brazilian consumers.

When this measure was announced by the Brazilian Central Bank, credit card interest in Brazil had the highest cost of the world financial system. The average rate has dropped from an unbelievable range of 500% a year to the current 300%, which is still very high.

Entering this type of debt is a clear indication that the Brazilian consumer still faces many difficulties in paying its debts. The level of defaults in the country in 2019 follows around 35%.

To make matters worse, in 2019, defaults by micro and small companies in Brazil reached a record high. The number of defaulters reached 5.3 million in March 2019, according to Serasa Experian.