According to the State of the World 2006, ethanol represented only a small share of Brazil's market until the 1970s, when the government made reducing oil import dependence a national priority. As a result of a combination of tax breaks and fuel blending mandates that drove investment in ethanol production and use, the industry made rapid progress.

The Brazilian government also promoted the manufacture and sale of all-ethanol cars and provided subsidies to increase sugar production and distillery construction, while infrastructure was developed to distribute ethanol to thousands of pumping stations around the country. As a result, by the mid-1980s, ethanol-fueled vehicles accounted for 96 percent of total car sales.

But growth slowed dramatically in the 1980s and 90s as oil prices fell and sugar prices rose, and by 1997, sales of ethanol vehicles came crashing down to less than 1 percent of total vehicle sales. To address this problem, in 2003 Brazil began encouraging flexible fuel vehicles that can run on virtually any mixture of gasoline and ethanol, changing the ethanol market overnight. In 2005, flex-fuel vehicles accounted for more than half of new cars sold.

Since the 1970s, Brazil has saved almost $50 billion in imported oil costs—nearly 10 times the national investment through subsidies—while creating more than 1 million rural jobs.

Brazil's experience shows how government leadership and smart policies can reduce dependence on imported oil while boosting local economies. It's a success story that a growing number of U.S. political and industry leaders are eager to emulate.