Ethanol Fuel – Is Sustainable Fuel Socially Responsible?

In our Business Ethics class, I had done a presentation on the Ethics of Ethanol Fuel and now that I am in Brazil, the topic of ethanol fuel and its relationship to sugar cane and other staple food commodities has been emphasized. And even if global trade increases and creates wealth it does not make any guarantees with regards to how that wealth is distributed as explained by our GMP Prof. Blum.

I proposed this question: “Is it ethical for rich countries to drive cars if it causes poor countries to starve?”

This problem was exacerbated in the World Food crisis in 2007 and 2008, when oil prices hit all time highs and the arbitrage relationship between oil and food was exploited.

Here is the relationship:

1. The US and Brazil are the largest producers (89%) of ethanol fuel using corn and sugar cane (respectively).
2. When oil prices increase, people have a tendency to switch to ethanol based fuels.
3. When the demand for ethanol increases (as a substitute) the demand on the inputs for ethanol (corn, sugar cane, potatoes) also increases.
4. There are real arbitrage opportunities by hedgers, speculators and even farmers as they shift the use of arable land to produce more valuable crops. However, even with arbitrage there are limits as arable land is limited (to create more arable land, there is often deforestation which creates its own sustainability issues).
5. Also poor countries have a much higher sensitivity to fluctuations in the price of raw commodities whereas rich countries are insulated from food costs because they only represent a small percentage of the final costs (including value added costs such as manufacturing, distribution and retail costs). It’s the difference between eating a bowl of rice versus a bowl of Rice Krispies.

The consultants at Deloitte confirmed this relationship in very concrete terms using the Brazilian gas pumps as an example (where prices for ethanol based fuel versus gasoline are explicitly posted in the same way gas prices are at the pump). Currently, the cost of Ethanol fuel is 50% the price of gasoline (although it only provides 70% of the performance). However, in the “off season” when sugar cane is more expensive, it can even reach a price of 80% of gasoline (which is clearly not as cost effective). There is a direct relationship between the price of sugar cane and the price of ethanol fuel.