= FOCUS: Brazil Ethanol Won't Cut US Gasoline Prices Soon

Jul 03, 2008 (Dow Jones Commodities News via Comtex) -- BRZEL | Quote | Chart | News | PowerRating -- By Kenneth Rapoza

Of DOW JONES NEWSWIRES

SAO PAULO (Dow Jones)--The Brazilian sugarcane industry wants U.S. consumers to know that it can save them money on gasoline. But just how much isn't likely to impress, energy market experts say.

"If anything, it's pennies on the dollar," said Robert Kaufmann, director of the Center of Energy and Environmental Studies at Boston University.

"This week, Iran and Iraq said it could increase oil production by about four million barrels a day and what has oil done? It's gone up," he said.

Oil prices rose by nearly $3 a barrel on Wednesday to $143.74 per barrel in New York, and they continued moving upward on Thursday.

This holiday weekend, Brazil's Union of Sugarcane Industries, or Unica, will launch a radio and print ad campaign called "Are We There Yet?" targeted to U.S. gasoline consumers in Florida and California. Their goal is to convince consumers at least in those states that the $0.54 per gallon tariff on Brazilian ethanol is impacting corn prices, corn ethanol and -- ultimately -- gasoline prices.

Florida and California were chosen because the states are seen benefiting most from importing sugarcane ethanol due to either a proximity to Brazil or clean-air mandates by the state government.

"In the medium-run and longer, it certainly would benefit U.S. consumers, while hurting U.S. oil refineries," said Adrangi Bahram, an international economics professor at the University of Portland.

"The simple economic theory shows that the net benefits are positive: the gain to U.S. consumers exceeds the loss to U.S. makers of gasoline," he said.

Brazil is the world's leading low-cost ethanol producer, making it from sugarcane, and by far the world's No. 1 ethanol exporter. It exports around 3 billion liters of ethanol to the U.S. directly and through the Caribbean each year.

The U.S. consumes around 10 million barrels of gasoline daily. If the tariff was removed and Brazil was to increase its exports by one billion liters, or around 264 million gallons, it would be the equivalent of 1% of U.S. gasoline consumption, Kaufmann of Boston University attests.

"Oil prices and therefore gasoline prices are dictated by so many moving parts that if the U.S. removed its tariff on Brazilian ethanol, it would likely have only a modestly positive effect on gasoline prices," said Tim Hanson, a senior analyst at Motley Fool in Washington D.C.

On July 2, a diverse coalition of 36 food companies and trade associations, from The Coca-Cola Company (KO) to Tyson Foods (TSN) and the Grocery Manufacturers Association urged in a letter to President George W. Bush to cut the tariff on Brazilian ethanol.

"The suspension of the 54-cent per gallon duty on (Brazilian sugarcane) ethanol will benefit Americans by introducing market competition for a product that is mandated and by fostering downward pressure for ethanol and its feedstock (corn)," they wrote, adding that dairy, livestock and poultry farmers, along with U.S. food consumers, would benefit from the cut because any perception that the U.S. was serious about allowing more cheap Brazilian ethanol into the country would likely cause corn prices to fall.

If corn prices fell, corn ethanol prices could fall with as it result. Then there's the prospect of more Brazilian ethanol coming into the U.S. at a lower cost. For corn ethanol producers to be able to convince blenders to buy, they'd have to lower their prices.

"There is certainly a struggle of interests out there, and it is hard to know who is going to win out," said William Moomaw, professor of international environmental policy at the Fletcher School of Tufts University.

"You have ethanol makers and the corn lobby pitted against American fuel consumers all across the nation," Moomaw said.

Rick Knmet, a corn ethanol analyst at DTN, a farm commodities research firm, said any indication that more Brazilian ethanol was coming into the states would surely put pressure on corn ethanol prices.

"It could push domestic ethanol producers out of the market," he said, adding that even with corn ethanol futures priced at $2.85 per gallon for the July contract on the Chicago Board of Trade, most ethanol makers aren't making any money. If they can't turn a profit with corn ethanol at record highs, what happens when corn ethanol prices fall?

For Knmet, more Brazilian ethanol would be a negative for corn ethanol companies overall. "They'd invest less, if at all. The corn ethanol market would likely liquidate," he said.

The real benefit might be more long term than short term. Joe Petrowski, chief executive officer of Gulf Oil, said he suspects corn ethanol prices would drop 20% or more if there was a move to reduce the tariff. Near term, gasoline prices might only decline three to five cents.

Gasoline prices in the U.S. are averaging around $4 a gallon, and Petrowski estimates that July gasoline prices in Boston, for example, would average around $4.10 per gallon.

Brazil ethanol prices are around $1.40 a gallon, plus the $0.54 tariff. Even with the taxes thrown on, it's still nearly $1 cheaper than corn ethanol in the U.S., making it that much harder for the pro-corn ethanol lobby to convince Washington lawmakers that the tariff is good for the country.

"We are in a serious energy crisis, and taking the tariff off Brazilian ethanol would be an important first step," Petrowski said.

"The rise of gasoline over the last five months is because traders are saying, 'look, we are running low on this stuff,' or are going to in the years ahead," Petrowski said.

"If you signal to the market that the world's biggest fuel transportation economy is addressing this issue, it will eventually affect prices," he said, adding that companies in Brazil would be more confident in investing in expansion, and new markets for the production of sugarcane ethanol might develop.

For Moomaw, the move would also provide a signal to other tropical countries in the Americas to start growing sugarcane to make ethanol.

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-By Kenneth Rapoza, Dow Jones Newswires, 5511-6847-4541; kenneth.rapoza@dowjones.com

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07-03-08 1242ET

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