In today’s Money Morning…Brazil had come up with a plan to reduce its dependence on oil…and things just took off from there…so it’ll be interesting to see what OPEC+ decides later today…and more…
In the mid-1970s, the Brazilian government launched its ‘pro-alcohol’ program.
It’s not what you think…well, kind of.
Yep, the new national alcohol program wanted to promote alcohol consumption…for cars.
You see, at the time, oil prices were soaring because of the OPEC crisis. So Brazil had come up with a plan to reduce its dependence on oil, which was expensive and in high demand.
Brazil is one of the largest producers of sugar cane in the world, and ethanol, or alcoól (alcohol in Portuguese) as it’s popularly known in Brazil, can be extracted from sugar cane and used to make biofuel.
The new national program conducted studies on producing ethanol at a large scale and even gave subsidies to distilleries. Many car companies in Brazil at the time — like Volkswagen, Fiat, Ford, and GM — adapted their cars so that they could run on both petrol and ethanol.
The first 100% ethanol car was the Fiat 147, which hit the markets in 1978.
And things just took off from there.
By 1986, 76% of all vehicles made that year ran on ethanol, according to Wikipedia.
Things dropped off a bit after sugar prices increased in the ‘90s, and Brazil had to import ethanol from the US.
But ethanol cars made a comeback in the 2000s after Volkswagen launched its ‘flex’ Gol car, which could run on both ethanol and petrol.
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Growing up there, my first car ever ran on alcoól — a Ford Escort. Except for the fact that in the mornings you needed to keep it running for a while before driving it, it ran well.
Ethanol as a fuel is still pretty popular in Brazil. In fact, in 2019, Toyota launched its Corolla Hybrid Flex, which can run on all three — petrol, ethanol, and electricity.
I mention all this because there’s an interesting dynamic going on in energy markets at the moment.
Energy companies did quite well in 2021, with oil and gas prices rising.
Both oil supply and demand fell during the pandemic in 2020. But, while demand has come back, supply hasn’t really kept pace with demand as oil producers kept a lid on production.
At the same time, as we mentioned last week, EV sales have done really well in 2021.
In December, EV car sales passed those of diesel in Europe.
And in China, electric cars made up a whopping 14.8% share of all new electric car sales in 2021 and is on track to reach 20% this year.
Those are big milestones.
Point is that if prices for something are high and there’s policy support, people will start making the switch, as it happened in Brazil with ethanol in the ‘70s.
Something to consider when oil prices are trading at close to US$90 and could be heading towards triple digits. Persistent higher oil prices could push people into EVs faster than expected.
So as OPEC+ meets later on today to decide on their oil output for March, they are in a dilemma.
The expectation is that they’ll stick to the plan of increasing by 400,000 barrels a day in March, even with oil prices high and the risk that oil production in Texas gets hit by cold weather.
Or they may increase production more than expected to keep oil prices down.
So it’ll be interesting to see what OPEC+ decides later today, and how all this plays into this year’s electric vehicles sales. Especially as money keeps flowing towards the energy transition.
BloombergNEF said this week that global investment in the energy transition hit a new record of US$755 billion in 2021, or a 27% increase from last year.
As the report said:
‘The global commodities crunch has created new challenges for the clean energy sector, rising input costs for key technologies like solar modules, wind turbines and battery packs. Against this backdrop, a 27% increase in energy transition investment in 2021 is an encouraging sign that investors, governments and businesses are more committed than ever to the low-carbon transition, and see it as part of the solution for the current turmoil in energy markets.’
Almost every sector is up, with most money (US$366 billion) going into renewable energy.
But the standout in the report is the second sector, electrified transport, with US$273 billion in investment and up a whopping 77% from last year. BloombergNEF expects that if the trend continues, the EV sector could overtake renewable energy investment this year.
And we could see even more money pour that way. According to BloombergNEF’s research, investment in the energy transition needs to average US$2.1 trillion a year between 2022 and 2025 to reach net-zero by 2050 and keep global warming in line with 1.75 degrees.
In other words, it needs to triple that of 2021.
So with money flowing into EVs, higher inflation, and favourable policies, battery metals is a good place to be this year, in my view.
Until next week,
For Money Morning
PS: Selva is also the Editor of New Energy Investor, a newsletter that looks for opportunities in the energy transition. For information on how to subscribe, click here.