Compiled by Elizabeth Sweitzer – Brazil Institute, 7/23/2012
In the past decade, Brazil has been making tremendous strides in oil production, leading Latin American figures for total output and drawing the attention of international oil investors. In the past 15 years alone, Brazil has tripled its production and is likely to double its production from its current 2.7 million barrels a day but the year 2020. According to a study by Harvard’s Kennedy School concerning global oil potential, Brazil ranks 4th in the world.
Recently however, Brazil has entered into a phase of economic inefficiency in their oil industry. Brazil’s state-owned Petrobras has suffered very low net revenue in the past 12 months, consequently raising the price of oil to Petrobas’s disadvantage. Meanwhile, other nations are forging ahead on oil production; Brazil’s negative figures have been met with new projections of oil abundance in the US, Canada, parts of Latin America and Africa. While horizontal drilling and hydraulic fracturing techniques have revolutionized natural gas and oil extraction in the U.S., Brazil on the other hand has to adapt to ultra-deep, fiscally draining, and environmentally hazardous pre-salt oil extractions. Just last year Petrobras expressed concerned that fixation on their resource sector in areas like oil and natural gas would make Brazil vulnerable to Dutch disease.
Brazil’s oil industry faces serious challenges maintaining positive production patterns. For instance, Jose Pinto believes that public-private sector coordination will be necessary in order to make the country attractive to foreign investors and to protect local industries. Through investing in chemical industry and broadening its manufacturing base, Pinto believes Brazil will be able to significantly curb its trade deficit. Others propose that Brazil’s protectionist scheme is precisely what slows foreign investment, development and innovation. Peter Millard and Rodrigo Orihuela suggest that Brazil should learn lessons from Mexico’s negative experience, where oil production fell to its lowest in 22 years this April, arguably as a result of Mexico’s failure to invest in exploration back in 2004. Finally, Brazil desperately needs to invest in infrastructure; for example, when Brazilian billionaire Eike Batista promised the moon in terms of oil production, he did not compensate for the infrastructural needs that would follow.
Instances like this remind us of the volatility of the oil industry, the extent of its tremendous costs, and the environmental consequences if there are mistakes. Brazil’s prospects for deep-sea drilling 7,000 m below the ocean floor are juxtaposed against a stark reality of spills and leaks that have incredible repercussions. On July 17, reports stated that Chevron could receive as much as a US$25 million dollar fine for oil spills off the coast of Brazil after a leak from one of their deep-sea drilling sites.
Brazil is now actively considering expanding its renewable resource sector, investing in projects such as wind-power farms. Nevertheless, Brazil depends on their oil manufacturing industry to provide some 390,000 jobs and billions of dollars in sales each year. Ensuring efficiency for their oil industry will be an asset for Brazil in the next few years in order to remain competitive in the global market and lead in global innovation.