Free Course Work On Impact Of Oil And Gas Production In Brazil

Published: 2021-06-22 00:16:47
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The question “why countries that do not have that much natural resources to boast of often appear more progressive and financially stable than countries that are staggeringly abundant in natural resources?” has been common among citizens of both resource-rich and non-resource-rich countries for a very long time. It is actually logical to think that a country rich in natural resources, especially the point-source and non-renewable ones such as oil, diamonds, and other ores, would outperform those that are less blessed because they already have an edge to begin with. However, according to Sachs & Warner (2001), the opposite happens. Sachs and Warner stated that while natural resources-rich countries may have undeniably larger export income potential than those less fortunate with natural resources, the resource curse thesis prevents that from happening. From a general point of view, resource curse is a rather paradoxical phenomenon wherein regions and countries rich in natural resources tend to experience considerably less economic growth and worse financial management and national development outcomes than countries that have fewer natural resources. Research and market analysts believe that resource curse has many causes. One of which is the government’s overspending of resources, time, and attention on a single industry which would most likely be the natural resources industry such as oil, gas, or mineral ore mining. The consequence is usually the neglect of all other productive and profit-generating industries which later on leads to the government’s overdependence of the natural resources where it focused all of its resources and attention on.

This makes the GDP or Gross Domestic Product of that country more volatile which exposes it to a huge risk of falling into a recession once the price of its specialty resource significantly goes down. The idea that the government has something to tap in case something bad happens or fails also leads to a neglectful and ineffective financial and organizational management. Politicians become more corrupt, especially when the revenue stream gathered from the resource-extraction activities can be easily diverted to the politician’s financial accounts with very little and often negligible traces left. The ambitions and plans of the people and their government regarding the proper management and usage of the natural resources conflict.

Brazil’s economy’s annual growth in terms of GDP in the past decade has so far been on the right track with the highest rate recorded somewhere around at 7.3% in 2010 (See figure 1.3). Imports and exports on oil and other commodities, plus the internationally famous fiscal crisis in 2009 was not able to affect Brazil’s economy that bad, thanks to the wise management of political leaders and the options available for Brazil to salvage its economy from what should have been a doom-scenario.

Nations that have larger economies and more powerful militaries such as the United States and People’s Republic of China appear to unwittingly and sometimes intentionally put pressure on third world countries that are abundant in natural resources and as a result, these weaker nations resort to yielding and tend to commit administrative mistakes which ultimately leads to poor economic growth despite the abundance in resources. In Summary, resource curse is the paradoxical explanation behind resource-rich and economically emerging countries’ slow growth and exposure to more conflicts. The Brazilian National Oil Refineries Help Deal with the Problem of Resource Curse Created by the Oil and Gas Industry in the Country and the Role of the Government in Maximizing the Benefits of the National Oil Refinery

Oil research and market analysts, and other oil regulation organizations estimate that Brazil’s offshore pre-salt oil fields contain about 50 billion oil barrels. It is important to take note that these are untapped oil reserves and if Brazil would be able to tap its natural resources as a response to its sustained and increasing demand for energy due to its booming economy and population, its estimated 50 million barrels of oil in reserve would be more than enough to turn the country into one of the world’s leading oil producers in the upcoming years and even decades.

Petrobras or the company officially known as Petroleo Brasileiro Sociedade Anonima is generally considered as Brazil’s national oil refinery, Petrobras is the largest oil exploration and manufacturing company in Brazil, with an output of about 2 million barrels of oil per day. It also owns and operates numerous oil tankers and refineries in the country. It specializes in deep-water and ultra-deep water oil exploration and drilling technologies and is actually one of the few well-versed companies in such technologies in the world.
Regardless of its oil reserves and output per day, Petrobras is still the largest company in the entire Latin America with approximately 118 billion USD in sales seen in the financial report it submitted in 2008 and the fourth largest company in the world in terms of market capitalization. The Brazilian government owns as much as 54% of Petrobras’ entire common shares while the remaining 46% is owned by private individuals and some companies.

Owning more than half of the company’s entire common shares gives the Brazilian government substantial control and influence on the company’s operations, finances, and overall management. If there is one great way how Petrobras helps the Brazilian Government deal with the problem of resource curse brought about by the oil and natural gas industries that would be its ability to be used by the government to combat inflation. In 2006, one of the crucial years for the oil industry because of the almost unpredictable changes in oil prices, the Brazilian government has decided to cap oil and natural gas prices as a preventive measure to combat possible inflation. To prevent from being totally bankrupt, “Petrobras has been obliged to top up what it produces with imports, which it must then sell to local buyers at a loss; legal requirements to hire and buy parts locally—to support Brazilian jobs and industry—have played havoc with the company’s budgets and schedules” . The Brazilian government has been able to use Petrobras as a shield against the harmful economic effects of the rapidly increasing petrol product prices—inflation, etc. Thanks to the government’s ownership of 54% of the giant’s total shares, the country’s economy was spared.

The oil giant suffered tremendous loses, yes, but market analysts have reason to believe that the Brazilian government would never let its longtime partner since 1953 down. Graca Foster, the giant oil company’s current boss stated that the government uses the model state oil company as an all-purpose policy tool that instantly solves its problems on how to keep prices low, help the broader economy in general, especially after being informed of the recent oil field discoveries off Brazil’s coast in the two consecutive years of 2007 and 2008. This is a rather complicated issue because as far as the management is concerned, Petrobras’ boss definitely does not want the current figures which show that the company is losing its glory that’s why she is pushing forward for a very intense management adjustment.

However, it would be logical to think that her good management and realistic goals would not reach anywhere if its majority shareholder, the Brazilian government would not let the company do what it needs to do to regain its glory as long as it intends to or as long as the oil prices in the international market remains volatile. The year to year changes in Brazil’s annual growth rate of Greed and Grievance is actually one of the best evidences of the type and extent of impact the oil and natural resources market can inflict on an economy. There were years wherein the country’s annual growth rate on Greed and Grievance were sky high and there were also years wherein it hit negative values plus the behavior of the curve was almost unpredictable (See Figure 1.2). This is so far, the largest and most critical role that the government plays in maximizing the benefits of its national oil refinery. Of course there are other minor benefits such as the company’s contribution to keeping thousands of people from being unemployed and in bringing in millions of dollars of revenue into the government’s coffers.

Section B

Brazil is one of the leading countries worldwide in terms of oil and gas, and other types of energy consumption. In fact, recent data shows that it is the 9th largest consumer of energy worldwide and the 4th largest among western countries led by the United States, followed by Canada and then Mexico. Energy consumption is one of the bases used by the international community, as well as by international boards and bodies such as the United Nations in some of their monitoring and regulating processes. Therefore, it is important for countries like Brazil to consider maintaining an acceptable level of energy consumption and its impact on the international community. Factors that contribute to Brazil’s relatively higher levels of energy consumption is its size (it is the fifth largest country in the world and the largest in South America), its population (over 192 million people as of 2010), and its economy (it has the largest economy among all Latin American countries).

In the past decade, Brazil’s energy consumption increased by up to 35%, which according to analysts is due to the rapid and sustained economic growth and transition. Fortunately, previous Brazilian government administrations were able to foresee that the country would turn out to be one of the leading consumers of energy worldwide and so they have laid out plans and long-term goals to increase overall energy production, particularly in the field of oil and natural gas.

Brazil, in the past years, has shown good signs that they are indeed eager to make such long-term goals happen. Recent literatures suggest that Brazil is investing more and more time and resources in increasing its oil and natural gas, and ethanol production, according to Business Monitor International (2012). Brazil’s energy production overall has been further boosted by the recent discoveries of some medium and large offshore oil deposits. In fact, according to a research forecast lasting up to the year 2020 about Brazil’s energy production capabilities, those oil deposits could transform Brazil into one of the leading oil producers in the international oil market.

Allowing Foreign Oil and Gas Companies to Create New Oil Refineries

Following the rapidly changing price of petroleum-based products in the past decade, the Brazilian Government has made a tough decision to implement a rather aggressive ethanol blending policy. This decision has been carried out considering that Brazil is the ninth largest energy consumer and the 7th largest consumer of petroleum-related products in the world. Meaning, if there is something that Brazil could do to be least dependent on oil, which could be a life-saver for its economy which can become progressively more dependent on oil just like what happened to other countries that are also rich in oil and natural gas.

It is important to remember at this point that the more dependent a country is on any singular resource or commodity, the more risky it becomes because a single downshift of prices of that commodity could lead to drastic consequences to the country’s economy as explained by the resource curse thesis. Brazil’s ethanol blending policy requires petrol product-retailers in the country to render an ethanol-fuel blend of 20-25% ethanol or 75-80% fuel on petrol. Brazil also boasts of a rich and stable sugarcane industry—the crop form which ethanol is extracted, making the country the second largest producer of ethanol in the world. All of these factors would most likely be considered undesirable for foreign oil and natural gas companies that are planning to put up refineries in Brazil because these aforementioned factors could only mean less profits and income for them. Meaning, foreign oil and natural gas companies may not be attracted to invest in Brazil which also means that Brazil just lost the interests of prospective employers which could have contributed to the country’s growth. However, its decision to implement its ethanol blending policy would have a positive impact on the country’s economy because first, the country would be less dependent on petroleum products and would therefore be less affected should oil price hikes go against the forecasts; second, the higher octane rating of fuels produced from the ethanol-fuel mixture would have a positive impact in terms of individual consumers’ energy consumption; and lastly, Brazil would serve as a good example for other countries and could testify that there are ways how economic and environment-friendly options can be combined.

Privatization of the National Oil Refinery pushing it to Compete with Foreign Companies on an Equal Basis

Petrobras, the largest oil and natural gas refinery in Brazil is a semi-public company. The Brazilian government owns more than half, 54% to be exact, of the Petrobras’ common stocks while the remaining 46% is owned by various private shareholders—some of them are companies while some are angel investors. This enables the government to have a good grip and control of the oil giant’s operations and finances which in fact proved to be an advantage as the government used its power over the oil giant to protect the company from the harmful effects of inflation brought about by the volatile oil prices since the past decade. Naturally, the company suffered the losses but is still far from being bankrupt. Privatizing the firm would mean removing the government’s control and influence on the company’s finances and operations. The company may be able to flourish and even dominate the entire international oil and gas market but this may be a bad move for the government because they would not be able to use a shield in case of a major disruptive event arises in the future. This may also be bad for foreign and domestic oil and gas companies; especially the small-scale ones because Petrobras would surely eat them up and continue monopolizing the market even more.

Implementation of a mixed model, with continued state ownership but expansion of the activities eligible for foreign oil and gas companies. This is a rather complicated move but it could be the answer that the Brazilian government is looking for. In this option, the government would still be the major shareholder, owning a little bit more than half of the company’s total number of common shares, and therefore retain control and influence finances, operations, and basically every administrative decision. It could be that the government could still take advantage of its company ownership in the future but that would not be very likely because the Brazilian government would not want to put Petrobras totally down as it would also lead to devastating losses for the entire economy and to the thousands employed by the oil giant. Implementation of a mixed model is actually a wise choice because it enables the government to expand its revenues and regain economic strength by increasing the number and diversity of investment options available for foreign oil and naturel gas investors while waiting for the government-dominated oil giant to recuperate the losses it experienced in the past decades as a result of the government’s ill-management. This is a single solution that could potentially solve two problems. The Brazilian government has almost nothing to lose should they choose this option although it would naturally appear to other Petrobras stakeholders and executives that the Brazilian government is fully taking advantage of its ownership of the company.

No matter how hard the bosses at Petrobras tries to put things right and to be back on track again, the political meddling prevents them from taking the right path. But then again, the downfall of a single company is nothing compared to the downfall of an entire economy. Even with the losses it suffered in the past years, Petrobras still remains in the highest ranks of top oil and natural gas companies which could be a sign that the government is far from abusing its ownership of the company. Brazil’s ownership of the company is truly a blessing not just to the Brazilian government but also to all Brazilians because they would have been bombarded and stunned by rapid inflation of commodities as a result of the volatile oil prices and the country’s economy which was largely dependent on oil before 2003 .

The Brazilian government has made a good job in negating the resource curse or the course of being rich in oil and natural gas. Instead of focusing entirely on a single product, it focused on using it to bolster the economy without relying too much on the revenues and profits that the government could potentially get from selling that product.

Conclusion

A thorough understanding of how resource curse works and how a government’s good and responsible governance could have a positive impact on the company’s economic growth despite the naturally-occurring economic recessions was truly crucial for a resource-rich and at the same time, energy-glutton country like Brazil. Its (the Brazilian government) ability to weight things and to solve problems efficiently—when they implemented an aggressive ethanol to fuel mixture ratio for economic and environmental purposes; to use its richness in resources as an advantage and not the other way around; and its wise management of its ownership of a huge oil company, are the factors that enabled Brazil to persevere in a rough economic season. Additionally, it still has several options left, such as implementing a mixed model wherein it will retain its ownership and control of Petrobras but make more investment options available for foreign oil and natural gas companies at the same time, which is again, a product of good governance in managing the oil and gas industry in the country.

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