BRAZIL: Desire for diesels

Brazilians want diesel-powered cars. So why can't they have them?

Hernandes de Paula Goncalves is the envy of his neighbors. He is one of few Brazilians who can legally drive a diesel-powered car in his home city of Sao Paulo.

He works in the road test department at Fiat do Brasil, which, along with the Brazilian operations of General Motors, Renault SA and Ford Motor Co., build 70,000 small diesel cars a year here. But they cannot sell a single one in Brazil.

They are all exported because Brazil, under a 30-year-old law introduced during the fuel crisis of the 1970s, bans the sale of cars with diesel engines. While diesel remains a banned fuel for small vehicles, it is heavily subsidized for commercial trucks and buses. Perversely, the country cannot refine enough to meet commercial demand.

But Goncalves can drive a Fiat Marea 1.9 TD on Brazil's roads for 50,000 kilometers as part of his test procedure. The diesel ban frustrates him. 'It is a pity to send them all abroad,' he says. 'If there were a choice, I would prefer a diesel. This is stronger - the torque is so much better than a gasoline engine.'

When he stops, he often is asked about the diesel car he is driving. 'Some ask me where I bought it. Many people would like to have a diesel car in Brazil, especially because of the high gasoline prices.'

The diesel ban is rooted in Brazil's automotive history. When Petrobras - Brazil's state-owned oil monopoly - built the country's first refineries, it followed the policies of North American refineries, producing more gasoline than diesel fuel.

fuel subsidies

Every month, Brazil's trucks and buses consume 3 billion liters of diesel. Meanwhile, its cars consume less than 2 billion liters of gasoline and 151 million liters of alcohol. To supply the truckers, Brazil spent $1.2 billion to import diesel fuel last year. Meanwhile, it exported $400 million worth of unneeded gasoline.

With diesel fuel in short supply, it makes little sense for the government to maintain an artificially low price. The diesel subsidy began during the oil crisis of the 1970s, when Brazil was highly dependent on gasoline imports. The government raised taxes on gasoline to subsidize diesel prices. Thus, the country avoided severe increases in freight charges.

At the same time, Brazil encouraged motorists to switch to ethanol by offering incentives. Since ethanol can be derived from Brazil's plentiful crop of sugar cane, the government thought it could protect the country from fluctuating oil prices. From there, it was a small step to banning diesel engines in automobiles.

sugar lobby

Thirty years later, the law does not make much sense. Elsewhere in South America, consumers have embraced diesel-powered cars. But Brazil still encourages motorists to put alcohol in their fuel tanks to preserve jobs in the sugar-cane fields.

The sugar-cane growers lobby remains strong, and the government still insists that each liter of gasoline should be at least 20 percent alcohol. Because the government created the incentives in the first place, it is reluctant to eliminate them. In the event of another oil crisis, Brazil wants to preserve its ethanol industry.

But the nation is not as vulnerable to oil shocks as it was in the 1970s. Brazil produces 70 percent of the oil it needs, and is not so dependent on imports.

An imbalance in refining capacity still distorts fuel prices. Brazilian refineries sell gasoline and diesel to distributors for almost the same wholesale price, about 20 cents per liter. But at the fuel station, gasoline's price rises sharply. Motorists pay about 62 cents per liter of gasoline. Meanwhile, government subsidies hold the price of diesel fuel at 32 cents per liter.

By allowing small vehicles to use diesel fuel, the government would have to eliminate diesel subsidies. That would create a political furor within the trucking industry. But the government is going to have to make a decision.

'Within 15 years, the country will have to increase its energy sources to drive cars,' says Henry Joseph, president of the energy commission of the Brazilian Association of Automotive Manufacturers. 'Then, the diesel will have to stop being a problem and become a solution.'

diesel endorsement

The Getulio Vargas foundation, one of the most respected economic research centers in Brazil, conducted a study on the likely impact of diesel-powered cars. The study concluded that wider use of diesel fuel would help the economy and environment, says Edson Parro, president of the engineering association that requested the study.

It may be a while before the study gets the government's attention. Brazilian bureaucrats are struggling with an electricity shortage, a shaky currency and an equally shaky economy.

The diesel lobby faces other hurdles, too. Refineries must improve the quality of diesel fuel to reduce pollutants.

'The Brazilian diesel has evolved, but it is still far away from worldwide quality standards,' says Decio Del Debbio, heavy-engine manager at DaimlerChrysler, which manufactures heavy-diesel engines in Brazil.

Cost is a factor. Nearly all Brazilian refineries belong to Petrobras. For the past decade, Petrobras had no money to improve refineries, causing predictable shortages of diesel fuel. But this may change.

In 1997, the government ended the Petrobras monopoly on oil drilling and refinement. Over the next five years, foreign oil companies are expected to spend $2.3 billion to build refineries. Meanwhile, Petrobras will spend an additional $4.7 billion to modernize its sites.

Joseph of the automakers' association believes the government eventually will legalize diesels in small cars. And Brazilian consumers appear ready for diesels, now that a new generation of clean, efficient engines is available. Brazilians can legally buy diesel-powered pickups such as the Ford Ranger and Toyota Hilux, plus sport-utilities such as the Chevrolet Blazer. But these are not cheap. With prices ranging from $17,000 to $25,000, they are too costly for many Brazilians.

fiat biggest producer

This must be a source of great frustration for automakers, which manufacture a variety of cheap diesel cars in Brazilian plants for export. Fiat Auto S.p.A. is the biggest producer of small diesel cars. In the first four months of the year, it exported 6,000 units - mostly the Palio wagon - to 40 countries. Brazilian automakers also export many vehicles to Argentina, where diesels account for 40 percent of total sales.

Automakers believe Brazil is a fertile market for diesels. Says DaimlerChrysler's Del Debbio: 'We have the technology, and we already manufacture here. We are ready.'

E-mail writer Pedro Kutney at pkutney@uol.com.br

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