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Brazil: What Happens If There's Another Oil Crisis?

The rise in oil prices caused by the impasse between Western powers and Iran due to the latter's nuclear programme has been a cause for concern not just for the European and North American markets, but also for economies that are currently less vulnerable, such as the Brazilian economy, for which the two oil crises of the 1970s had catastrophic consequences.

Photo by Fábio Pinheiro on Flickr (CC BY-NC-ND 2.0)

Photo by Fábio Pinheiro on Flickr (CC BY-NC-ND 2.0)

Four decades of oil flow

The first oil crisis, in 1973 – a result of US support for the Israelis in the Yom Kippur War – and the second crisis, in 1979 – a consequence of the Iranian Revolution – bring back bad memories for the countries that import the commodity. In Brazil, the consequences of those crises were an inflationary spiral and an increase in foreign debt to stratospheric levels.

Similar stories have recently been dominating the news and discussions in the blogosphere. For example, during the last week of February the price per barrel rose beyond US $120 with the announcement from the Israeli authorities that an attack on the Iranian nuclear complex was imminent, in addition to the embargo on Iranian trade imposed by the EU, to commence on the 1st July. In response, Iran made its move by freezing the sale of oil to France and the United Kingdom, promising to extend its retaliation to other European countries.

Oil rig at Angra dos Reis. Photo from Programa de aceleração do crescimento (Growth acceleration programme) on Flickr (CC BY-NC-SA 2.0)

Oil rig at Angra dos Reis. Photo from Programa de aceleração do crescimento (Growth acceleration programme) on Flickr (CC BY-NC-SA 2.0)

Another more radical development is Iran's threat of closing the Strait of Hormuz, through which almost half of all oil used throughout the world passes. There are therefore real reasons to fear another crisis, especially considering the current events in the context of what already happened in the region decades earlier. Iran, as the world's fifth largest producer of oil, showed in 1979 that it has enough power to affect even the healthiest of economies if it freezes – or even slows – its oil exports.

The dependency that modern societies have on the energy matrix goes far beyond use in motor vehicles. To have some idea, just read a few of the examples [pt] mentioned by Massimo De Maria in his “Informação Incorrecta” (“Incorrect Information”) blog.

Uma camisa de poliéster, um dentífrico, um fertilizante, uma lata de tinta, uma caneta, um rimmel, um amaciador para roupa, um creme para as mãos secas, uma embalagem de cola, um par de sapatos, um móvel para a cozinha, um computador, um jogo para crianças, o adoçante para os bolos, a insulina, um frigorífico, um antibiótico: o que têm em comum todas estas coisas? O petróleo.

A polyester shirt, toothpaste, fertiliser, a tin of paint, a pen, mascara, fabric conditioner, hand moisturiser, a cola bottle, a pair of shoes, kitchen appliances, a computer, a child's toy, food sweetener, insulin, a freezer, an antibiotic: what do all these things have in common? Oil.

It is therefore clear that another oil crisis would immediately affect not only the economies of importer nations, but also those countries, such as Brazil, that export to the affected countries. First of all, it would result in sharp inflation, followed by a recession. It is, in reality, a vicious circle, as even if a product is not made of oil, it will certainly be transported to its consumer via forms of transport that use petrol, kerosene or diesel.

Solutions for Brazil

For central banks such as Brazil's, there remains the difficult choice of combating inflation with a squeeze on monetary policy or through stimulating economic activity. On this subject, the “Sensor Econômico Brasil” (“Brazilian Economic Sensor”) Blog, by Economics professor José Álvaro de Lima Cardoso, published an article [pt] on the effect of fossil fuels on inflationary pressure in Brazil.

Em um ano de choque de preços dos alimentos –principalmente no primeiro semestre–, disparada de serviços em decorrência da renda em alta e aumento de combustíveis e transportes, a inflação não suportou os focos de pressão e o IPCA [Índice Nacional de Preços ao Consumidor Amplo] fechou 2011 no teto da meta do governo, de 6,5% –mais do que os 5,91% de 2010–, informou o IBGE (Instituto Brasileiro de Geografia e Estatística) nesta sexta-feira. Esta é a maior taxa desde 2004, quando o indicador ficou em 7,6%.

In a year of food price shocks – primarily in the first half of the year – an increase in services as a result of high income, and greater use of fossil fuels and transportation, the inflation level could not take the pressure and the IPCA [National Index of Prices for the General Consumer] ended 2011 at the upper limit of the government's target, at 6.5% – more than the 2010 level of 5.91% – the IBGE (Brazilian Institute of Geography and Statistics) announced on Friday. This is the highest level since 2004, which the figure was 7.6%.

The Brazilian national oil company – Petrobrás – has been publicising the positive aspects of its most recent achievements – that is, the exploration of the pre-salt layer (an undersea strip that stretches between the Brazilian states of Espírito Santo and Santa Catarina, which looks promising for oil drilling). However, oil extraction is still in the very early stages, and so Brazil is forced to import oil from the Middle East due to the increase in domestic consumption and the fact that although the country already produces crude oil, it is not self-sufficient in the end-products. Furthermore, the hurry to no longer depend on imported oil products contributed to the leak at the Chevron rig last year, as Global Voices reported in December 2011.

Consequently, in order to maintain current price levels in foreign markets, Petrobrás will no longer be able to subsidise prices for Brazilians, and a rise in the price of fossil fuels will be inevitable. On the other hand, the current events “bring the possibility of the commencement of a new and special industrialization cycle that promises to be the most important in our economic history” claims [pt] Petrobrás Distribution engineer and ex-Managing Director, Rodolfo Landim.

Sugar cane. Photo by Cacero Omena on Flickr (CC BY 2.0)

Sugar cane. Photo by Cacero Omena on Flickr (CC BY 2.0)

Since the rise in consumption is inversely proportional to the available reserves and, consequently, wars and disputes tend to spread as a result of the exhaustion of those reserves, Brazil is protecting itself from international price fluctuations by starting up new refineries and moving forward with biofuels, in which Brazil is the world leader with the project having been strengthened precisely because of the 1973 crisis. Robson Cadoch Valdez, a PhD student of International Strategy Studies said [pt] in his Cenário Externo (Outside Scenario) blog that:

Talvez, para o Brasil, esta seja uma oportunidade para promover o etanol brasileiro. Da mesma forma que na década de setenta o país desenvolveu seu programa alternativo de combustível em um período de crise do petróleo, agora pode ser a oportunidade de intensificar a promoção do nosso etanol como alternativa brasileira a um provável aumento no preço do petróleo no mercado mundial.

Perhaps, for Brazil, this is an opportunity to promote Brazilian ethanol. In the same way that the country developed its alternative fuel programme during a time of oil crisis in the seventies, now could be the time to intensify promotion of our ethanol as a Brazilian alternative to a likely rise in oil prices in the global market.

In a world where “oil crises” will get more and more frequent, possessing reserves such as the pre-salt layer and alternative energy sources such as biofuels involves taking on greater responsibilities, such as preserving this heritage and the sustainable exploration of areas where sugar cane culture has been threatening the survival of indigenous communities and small farmers (as was seen in an article published by Global Voices on 20th July 2011). It would be bad business to exchange peace for war, as is the case in Iran today.

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