How Brazilian ethanol could help Iran outwit American sanctions.
Brazilian President Luiz Inácio Lula da Silva has been spending a lot of time with his Iranian counterpart Mahmoud Ahmadinejad lately, to the consternation of the former's supporters at home and friends elsewhere in the West. Brazil, currently a member of the U.N. Security Council, has been unapologetic about its newfound relationship with Iran, which produced a dubious nuclear fuel-swap deal last month; it defends Iran's right to enrich uranium and rejects any idea of tough economic sanctions. The budding friendship has baffled Washington: Why would this Latin American country, otherwise a U.S. ally, insist on cozying up to Iran to the detriment of its relations closer to home?
There are several possible explanations. Brazil has long harbored its own nuclear aspirations, and increasingly seeks to define its own foreign policy and emerge as an independent global power. But Lula's motives may be less complicated than all that: There are also $10 billion in Brazilian-Iranian trade deals to be had. Perhaps the most intriguing, and strategic, aspect of those trade relations has to do with sugar.
Brazil is the world's largest sugar grower. This year it experienced a bumper crop, with output growing 16 percent from a year earlier. But due to a global glut, sugar prices have plunged 57 percent since February. Because sugar cane is a perishable crop that cannot be stored, the best way for Brazil to generate value from its undervalued surplus is by converting it into ethanol, of which Brazil is already the second-largest producer (after the United States) and a major consumer (for years Brazilians have driven mostly flex-fuel cars, which can run on any combination of gasoline and ethanol). The country's ethanol production is expected to rise 19 percent to 8 billion gallons this year.
For Tehran, Brazil's surplus ethanol could be a strategic savior. Iran is a major exporter of crude oil, but lacks the refinery capacity to process most of it; as a result, the second-largest oil producer in OPEC depends on other countries' exports of refined gasoline. A conference committee in the U.S. Congress is hammering out legislation that aims to exploit this weakness by imposing sanctions on foreign companies that supply refined petroleum products to Iran. Tehran has been bracing for these sanctions for a while, taking measures to address its Achilles' heel: building seven new refineries, expanding existing ones, converting cars to run on natural gas (of which Iran has the world's second-largest reserves), and securing alternative gasoline supplies from China and Venezuela.
But none of these efforts would give Iran the immediate injection of motor fuel it needs as swiftly as Brazil's ethanol. Brazil could replace most of the 5.8 million gallons of gasoline that Iran imports daily (a conventional internal-combustion car engine can handle up to 20 percent ethanol in its fuel blend without damage to the engine; in the United States most cars already run on 10 percent). Doing so would pull the teeth out of the gasoline sanctions legislation, rendering it useless before it even reaches President Barack Obama's desk.
If this were to happen, however, Congress and the Obama administration would have only themselves to blame. For years, Brazil has been clamoring to export its surplus ethanol to the United States, only to be blocked by lawmakers beholden to powerful American agricultural lobbies. If not for a prohibitive 54-cent-per-gallon import tariff on Brazilian ethanol -- not to mention a sugar quota and tariff system that restricts imports and keeps sugar prices in the United States much higher than the world price -- the fuel could have ended up in American gas tanks rather than reducing the country's leverage with Tehran.
But American lawmakers seem less afraid of a nuclear Iran than they are of angry American corn farmers and ethanol producers -- or, at least, want to have it both ways. Many champions of the Iran Refined Petroleum Sanctions Act, as the proposed legislation is called, are also defenders of the tariff. In the Senate, all but two of the nine co-sponsors of recently introduced legislation to extend the tariff -- which is due to expire next year -- by an additional five years are also co-sponsors of the Iran sanctions bill. Thirty-six supporters of the same sanctions act in the House of Representatives are also co-sponsors of the tariff-protecting Renewable Fuels Reinvestment Act.
The tariff on Brazilian ethanol has been a lingering source of tension between Brazil and the United States for years. Both Presidents George W. Bush and Obama, in their meetings with Lula, rejected his request to eliminate the tariff. Now Lula is taking his revenge, and it's surely a sweet one.
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