Tuesday, September 30, 2008

Sugar and Energy Independence

Energy independence is something we've covered, but a new NBER paper (w14362) takes a more detailed look at Brazil's success.
The recent world energy crisis raises serious questions about the extent to which the United States should increase domestic oil production and develop alternative sources of energy. We examine the energy developments in Brazil as an important experiment. Brazil has reduced its share of imported oil more than any other major economy in the world in the last 30 years, from 70 percent in the 1970s to only 10 percent today. Brazil has largely achieved this goal by: (1) increasing domestic oil production and (2) developing one of the world's largest and most competitive sources of renewable energy -- sugarcane ethanol -- that now accounts for 50 percent of Brazil's total gasoline consumption. A counterfactual analysis of economic growth in Brazil from 1980-2008 suggests that GDP is almost 35 percent higher today because of increased domestic oil production and the development of sugarcane ethanol. We also find a notable reduction in business-cycle volatility as a result of Brazil's progression to a more diversified energy program. Nearly three-fourths of the welfare benefits have come from domestic oil drilling, however, as rents have been paid to domestic factors of production during a time of rising oil prices. We discuss the potential implications of Brazil's energy program for the U.S. economy by conducting historical counterfactual exercises on U.S. real GDP growth since the 1970s.
Suffice it to say we cannot really follow either of Brazil's policies. Increasing US production simply isn't good enough and sugar is a nonstarter (See the graph below; I used raw sugar rather than sugarcane, but the point holds.) Ethanol has by any measure been a heavily subsidized failure and we just do not have many good alternatives, save new technology. Perhaps I should have alluded to the forthcoming Chevy Volt in the title of this post.

Update: Tim Kane now has a post on this paper over at Growthology.

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