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Petrobras and the Brazilian Presidential Election

Petrobras and the Brazilian Presidential Election

1200px-Oil_platform_P-51_Brazil.jpg

"Oil platform P-51 (Brazil)" by Divulgação Petrobras / ABr - Agência Brasil [1]. Licensed under Creative Commons Attribution 3.0-br via Wikimedia Commons

In the most recent Brazilian presidential debate between Marina Silva, Dilma Rousseff, and Aecio Neves, there was a discussion about the future of oil in Brazil, specifically in regard to continued deep sea drilling. Rousseff, the current president, claimed to see this type of drilling as crucial to the continued support of public services in Brazil, while Marina Silva, a former environmental minister, took issue with this development and questioned its future in Brazilian oil exploration. It seems Rouseff's view is winning in Brazil: The Brazilian government has recently planned to sell billions of dollars worth of offshore oil rights to its state-run oil company, Petrobas. However, this move is expected to burden the company with new and substantial costs at a time when it has seen its debt increase rapidly. Yet, the performance of Petrobras is key for future investment in oil in Brazil, as well as in other sectors, and the state-run company will play an important role in driving the country's continued economic growth.

Some investors have raised concerns that the recent move by the government had corrupt motives. "This confirms our worst fears," said analysts at Itaú BBA in Sao Paulo, a Brazilian investment bank. In these investors' eyes, this deal is inefficient, as the costs outweigh the benefits in both the short and medium terms. Furthermore, the government will also receive 76.5% of all oil produced after development costs are paid, money that it will then be able to transfer to local governments. Transferring oil money to localities could lead to potential misuse of oil, a lack of competition, and corruption, as has been the case in different degrees in Mexico, China, and Venezuela.

Regardless of corruption, Brazil’s growth and continual competition with other BRIC's is closely tied to how much, and in what ways, the government chooses to invest in Petrobras, as well as how it chooses to open up investment from foreign oil companies and domestic startups. Joao August, director at the Eurasia Group, agrees that Brazil has to be more flexible in terms of its share of investment in oil, both with international oil companies as well as with local startups that may be interested in forming partnerships with the government. To begin to approach this competitive domestic model, Brazil should follow more closely the path of Norway's Statoli, which has dealt with debt and the fulfillment of production targets much more effectively. In fact, Petrobras has already been working with Statoil, in some cases actually discovering oil in its new pre-salt sites off Brazil's southeastern coast. Statoil is also interested in the technological development of new oil-drilling techniques, which could further guide Brazilian development in the energy sector.

And on the question of inflation that the candidates continue to bring up, President Rousseff should again look to Norway for advice. Norway currently enjoys an inflation rate hovering around two percent, and it is Norway's sovereign wealth fund that can largely be credited for controlling inflation in the country. There are problems with the fund, however, and experts admit that comparisons to the Brazilian situation can only be made up to a certain point. However, if Brazil can imitate Norway, it could avoid the inflationary effects that massive inflows of dollars will bring when its new pre-salt discoveries begin to yield oil in the coming decades.

Most importantly, Brazil must address its general populace about the politics that are tied to oil, in order to convince the people that national government's decisions serve their interests and the long term growth of Brazil. Ultimately, what will lead Brazil down the route of a responsible resource-endowed country will be that its national oil company remains competitive and free of political corruption.

Indonesia's Tepid Response to ISIS

Indonesia's Tepid Response to ISIS

*Updated* Events: 9/16 - 9/21

*Updated* Events: 9/16 - 9/21