Much of America's energy debate can be summed up as "drill, baby, drill" versus "farm, baby, farm." Fans of conventional energy are pressing for the development of America's native oil and gas resources, while advocates of renewable energy call for greater amounts of biomass, either as conventional ethanol or
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next-generation cellulosic ethanol. Ethanol advocates point to Brazil and credit its switch to sugar-cane ethanol with helping to insulate the country from oil shocks of recent years. But digging a bit deeper into the data tells a more interesting tale: while ethanol certainly helped Brazil economically and environmentally, oil production was responsible for three-quarters of the energy wealth created by Brazil's energy development over the last twenty-eight years. How would the United States fare with comparable policies?
Researchers Roger Aliaga-Diaz, Joseph H. Davis, and Marc D. Weidenmier will present their recent National Bureau of Economic Research working paper, "Is Sugar Sweeter at the Pump? The Macroeconomic Impact of Brazil's Alternative Energy Program." AEI's Kenneth P. Green will moderate.
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11:30 a.m.
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Registration and Luncheon
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12:00 p.m.
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Presenters:
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Roger Aliaga-Diaz, Vanguard Group
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Marc D. Weidenmier, Claremont McKenna College
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Moderator:
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Kenneth P. Green, AEI
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1:30
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Adjournment
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WASHINGTON, JANUARY 30, 2009--Earlier this
week, President Barack Obama spoke about the need to "seize the promise
of energy independence" via increased efficiency and the use of
alternative energy sources. "Energy independence" has been a popular
buzzword for years, but the United States continues to heavily rely on
imported oil. On January 28 at AEI,
Marc D. Weidenmier presented a paper written with Roger Aliaga-Diaz and
Joseph H. Davis on the macroeconomic effects of Brazil's increase in
ethanol and oil production and its implications for the United States.
He explained that higher energy production has contributed to
significant economic growth in Brazil and may have the capacity to do
the same here. Weidenmier, a professor of economics at Claremont McKenna College,
first spoke about the negative effects of oil shocks on economic
activity. He mentioned that every recent recession in the United States
has been preceded by increasing oil prices, which tend to lower output.
Energy importers are more vulnerable to oil shocks, and the United
States currently imports 60–70 percent of the oil it consumes. Brazil, however, "has the distinction of being the only major
economic power which is . . . pretty close to being energy
independent." Most cars in Brazil can run on a combination of ethanol
and gasoline, and the sugar ethanol used in Brazil is seven times more
efficient than corn ethanol. Brazil increased domestic energy output in
response to the oil shocks of the 1980s by heavily subsidizing both the
ethanol and oil industries, increasing the domestic output of both.
Brazil's GDP is now much more insulated from the effects of oil price
shocks than it was in the 1980s. Weidenmier and Aliaga-Diaz estimate
that Brazil's GDP would be 30 percent lower if it had not increased
either oil or ethanol production. Most of this added stability and
growth came from oil, not ethanol. Weidenmier also spoke about the potential for the United States to
expand its oil production dramatically. There is uncertainty about how
much oil we could produce, but he estimated that if the United States
had drilled every available deposit over the last thirty years, we
could have reduced the average import share of oil to 14 percent and
increased GDP about 10 percent. He concluded that the United States
could not completely eliminate oil imports via drilling but that
greater domestic oil and natural gas production could get us much
closer. Brazil's success with sugar ethanol, however, cannot be replicated
with corn ethanol in the United States. Brazil has a comparative
advantage in the production of sugar, both because of low labor costs
and environmental conditions. Also, because corn, unlike sugar, is a
feedstock, its use as a fuel drives up food prices. Weidenmier
estimated that the use of a third of United States corn production for
fuel has raised average grocery bills by 20 percent. The economic models that Weidenmier uses predict even higher gains
from energy production in times of higher energy prices. Weidenmier
mentioned that if oil prices are on an upward trajectory, domestic
energy production looks like an even better investment. Total energy
independence is not necessary to reap significant economic benefits
from oil production: Brazil enjoyed increased revenue, job growth, and
a measure of insulation from energy shocks via significant marginal
increases, and this may be possible in the United States as well. --ABIGAIL HADDAD For video, audio, and event information, visit www.aei.org/event1849. For media inquiries, contact Veronique Rodman at 202.862.4870 or vrodman@aei.org. ###
Roger Aliaga-Díaz is a senior economist in the economic strategy unit at the Vanguard Group. His research focuses on monetary policy, global financial markets, and the U.S. economy. Mr. Aliaga-Díaz has published studies on a variety of investment and macroeconomic issues and he has presented his research at various academic and business forums, including most recently at the Board of Governors of the Federal Reserve System and the American Economic Association. Prior to joining Vanguard, he was a visiting professor of macroeconomics at Drexel University's LeBow College of Business.
Joseph H. Davis is the chief economist and head of the economic strategy group at the Vanguard Group, where he helps formulate the outlook for the economy and fixed income markets. Mr. Davis is frequently quoted in the financial press on macroeconomic trends and has published numerous studies on a variety of investment and economic issues in leading journals. He has presented his research at various business and academic seminars, including Harvard University and the Federal Reserve Board. In 2004 Mr. Davis was selected as a faculty research fellow by the National Bureau of Economic Research.
Kenneth P. Green studies public policy with respect to air pollution and climate change, energy and the environment, transportation and the environment, and environmental chemicals as a resident scholar at AEI. His work includes analysis of Canadian environmental policy. He has authored numerous policy studies, newspaper and magazine articles, several encyclopedia entries and book chapters, and a textbook for middle-school students titled Global Warming: Understanding the Debate (Enslow Publishers, 2002). Mr. Green has worked on both U.S. and Canadian policy, first at California's Reason Foundation, then for nearly three years at British Columbia's Fraser Institute.
Marc D. Weidenmier is the William Podlich Associate Professor of Economics and the director of the Lowe Institute of Political Economy at Claremont McKenna College. His most recent research examines the effects of increased domestic energy production on reducing the negative effects of oil shocks on economic activity. Mr. Weidenmier is also a member of the editorial board of the Journal of Economic History and is a research associate at the National Bureau of Economic Research. He has published in leading economic journals including the American Economic Review, Quarterly Journal of Economics, Journal of Financial Economics, Economic Journal, and the Journal of Economic History.
