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Brazil Petroleum Production

 
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Brazil Petroleum



Petroleum

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 propane subsidy.

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


 


 



 

 


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Table B. Chronology of Important Events
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Historical Background and Economic Growth

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The Sugar Cycle, 1540-1640
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- A Period of Sweeping Change, 1930-45
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