EVENTS
Energy Lessons from Brazil
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Date:
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Wednesday, January 28, 2009
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Time:
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1:00 PM -- 2:30 PM
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Location:
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Wohlstetter Conference Center, Twelfth Floor, AEI 1150 Seventeenth Street, N.W., Washington, D.C. 20036
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WASHINGTON, JANUARY 30, 2009--Earlier this week, President Barack Obama spoke about the need to "seize the promise of energy independence" via increased efficiency and the use of alternative energy sources. "Energy independence" has been a popular buzzword for years, but the United States continues to heavily rely on imported oil. On January 28 at AEI, Marc D. Weidenmier presented a paper written with Roger Aliaga-Diaz and Joseph H. Davis on the macroeconomic effects of Brazil's increase in ethanol and oil production and its implications for the United States. He explained that higher energy production has contributed to significant economic growth in Brazil and may have the capacity to do the same here.
Weidenmier, a professor of economics at Claremont McKenna College, first spoke about the negative effects of oil shocks on economic activity. He mentioned that every recent recession in the United States has been preceded by increasing oil prices, which tend to lower output. Energy importers are more vulnerable to oil shocks, and the United States currently imports 60–70 percent of the oil it consumes.
Brazil, however, "has the distinction of being the only major economic power which is . . . pretty close to being energy independent." Most cars in Brazil can run on a combination of ethanol and gasoline, and the sugar ethanol used in Brazil is seven times more efficient than corn ethanol. Brazil increased domestic energy output in response to the oil shocks of the 1980s by heavily subsidizing both the ethanol and oil industries, increasing the domestic output of both. Brazil's GDP is now much more insulated from the effects of oil price shocks than it was in the 1980s. Weidenmier and Aliaga-Diaz estimate that Brazil's GDP would be 30 percent lower if it had not increased either oil or ethanol production. Most of this added stability and growth came from oil, not ethanol.
Weidenmier also spoke about the potential for the United States to expand its oil production dramatically. There is uncertainty about how much oil we could produce, but he estimated that if the United States had drilled every available deposit over the last thirty years, we could have reduced the average import share of oil to 14 percent and increased GDP about 10 percent. He concluded that the United States could not completely eliminate oil imports via drilling but that greater domestic oil and natural gas production could get us much closer.
Brazil's success with sugar ethanol, however, cannot be replicated with corn ethanol in the United States. Brazil has a comparative advantage in the production of sugar, both because of low labor costs and environmental conditions. Also, because corn, unlike sugar, is a feedstock, its use as a fuel drives up food prices. Weidenmier estimated that the use of a third of United States corn production for fuel has raised average grocery bills by 20 percent.
The economic models that Weidenmier uses predict even higher gains from energy production in times of higher energy prices. Weidenmier mentioned that if oil prices are on an upward trajectory, domestic energy production looks like an even better investment. Total energy independence is not necessary to reap significant economic benefits from oil production: Brazil enjoyed increased revenue, job growth, and a measure of insulation from energy shocks via significant marginal increases, and this may be possible in the United States as well.
--ABIGAIL HADDAD
For video, audio, and event information, visit www.aei.org/event1849.
For media inquiries, contact Veronique Rodman at 202.862.4870 or vrodman@aei.org.
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