The fast-growing requirements of petroleum and petroleum
by-products were met initially by imports. However, foreign-exchange
difficulties, coupled with strategic considerations, led to efforts
to reduce the country's dependence on imports.
In the early 1950s, the government granted a near monopoly of the
exploration, production, refining, and transportation of oil to the Brazilian Petroleum Corporation (Petróleo Brasileiro
S.A.--Petrobrás), the state-owned oil company, and made resources
available for investments. Emphasis was placed on the expansion
of a domestic refining capacity because world oil prices were low
and no problems were envisaged with oil supply. Thus, an important
refining sector developed gradually.
The oil crises of the 1970s placed Brazil in a vulnerable situation.
In 1974 almost 80 percent of Brazil's total oil consumption was
imported, and the increases in oil prices imposed a substantial
burden on the country's balance of payments. Consequently, reducing
dependence on imported energy, particularly petroleum, became the
main objective of energy policy. This reduction was to be achieved
by large investments in petroleum substitutes, notably electric
energy and ethanol, and by a substantial expansion in the exploration
and domestic production of petroleum. Although modest oil fields
were not discovered until late in the 1970s, investments in the
energy sector increased from around 10 percent of total investment
in the early 1970s to a peak of 23.5 percent in 1982-83. As a proportion
of GDP, investment in energy increased steadily, from 2.8 percent
early in the 1970s, to a peak of 5.0 percent in 1982.
The government also implemented the energy price policy in reaction
to the 1979 oil shock. The basic assumption was that the price of
oil would remain at its high 1979 level. Thus, emphasis on promoting
substitution was absolute. The problem, however, was that this emphasis
did not change after oil prices began to decline. To encourage substitution,
the government set energy prices. The price of gasoline was set
at a high level, not only to reduce its use but also to finance
Petrobrás's exploration effort and to subsidize other petroleum
products. The prices of diesel fuel and propane (extensively used
for cooking) were maintained artificially low, requiring subsidies.
The low diesel price was intended to keep transportation costs from
increasing sharply, and social arguments were used to justify the
To induce the purchase of ethanol-propelled cars,
the price of ethanol was maintained at 60 percent of that of gasoline.
To finance this subsidy, a mixture of 20 percent of ethanol in the
gasoline was established. The high gasoline prices exceeded the
cost of ethanol, and the profits were used to cover the subsidy.
Specially low prices for electric energy were established to encourage
the replacement of fuel oil and other oil derivatives in production.
The combination of conservation and substitution, along with the
expansion of domestic production, reduced the country's dependence
on imported crude oil, from around 80 percent in the late 1970s
to 45.6 percent in 1990. Domestic output of crude oil increased
from an average 165,000 barrels a day in 1975 to some 800,100 barrels
a day by 1996. By the end of 1995, Brazil's proven reserves had
reached 4.8 billion barrels and potential reserves were at 8.8 billion
barrels. About 64 percent of Brazil's domestic oil comes from the
continental shelf in the Campos Basin, which accounts for 83 percent
of proven reserves. The country's petroleum reserves may actually
reach 20 billion barrels if as yet unproven discoveries in deep
water off the Brazilian coast are included.
Despite these advances, however, the rigidity of the energy price
policy brought about serious problems. The maintenance of the gasoline-ethanol
price differential and other inducements led to a rapid increase
in the purchase of ethanol-propelled automobiles and to a growing
conversion of gasoline cars to ethanol. Moreover, the basic assumption
that the price of oil would remain high was incorrect. Although
world oil prices declined, the price policy remained in effect for
ethanol producers, owners of ethanol-propelled cars, and the motor
vehicle industry. Additionally, the real gasoline price was eroded
gradually by the government's tendency to fight inflation by tampering
with the prices of goods and services produced by the public sector.
Also, the substitution of ethanol for gasoline caused a swift reduction
in the sale of gasoline in the domestic market. Consequently, the
profits Petrobrás obtained initially from gasoline dwindled
quickly, and the company required assistance from the treasury for
its exploration program and to cover various subsidies. The sharp
increase in the use of diesel fuel for transportation, created by
this fuel's subsidy, together with technical rigidities in refining,
forced Petrobrás to produce much more gasoline than was required
by the domestic market. This excess had to be sold abroad, often
at below-cost prices. Because the demand for diesel fuel continued
to grow and the demand for gasoline to shrink, Petrobrás
was forced to invest heavily in changing the product profile of
its refineries. In the early 1990s, the government reduced the gasoline-ethanol
price differential (in 1993 the price of ethanol was 78.4 percent
of that of gasoline). The price of gasoline was maintained sufficiently
high to prevent massive subsidies to ethanol. The prices of diesel
fuel and propane were increased.
Data as of April 1997