Brazil's Oil Discoveries Bring New Challenges

Volume 13, Number 1
First Quarter 2011

Brazil's discovery of large offshore oil reserves has secured the country's place among the global oil powers. However, producing the oil will be a complex and expensive endeavor, write Stephen Kay and Laurel Graefe, both of the Atlanta Fed's research department. In "Brazil's Oil Discoveries Bring New Challenges," the authors explore the logistical and political hurdles the country must overcome to unlock the benefits of its newfound resource wealth.

Brazil OilLocated under miles of sand, rock, and salt beneath the seabed, the recent discoveries present considerable logistical challenges. As a result, "production is likely to be both difficult and costly," say the authors. They note that officials are also concerned that the domestic oil services industry may not have the capacity to handle the surge in activity. For instance, Petrobras, Brazil's state-owned energy company, will have to hire thousands of new engineers, which could draw labor resources from other parts of the economy. The country's infrastructure will likely come under strain as well, write Kay and Graefe, who note that Brazil's "ports, airports, and roads are already straining as rising economic demand outpaces domestic infrastructure investment."

The promise of Brazil's oil wealth has prompted the government to take greater control over the oil industry. The government has increased its ownership stake in Petrobras, created a new production-sharing agreement for subsalt and strategic areas, and started a new state-owned oil firm to represent it in the subsalt ventures. While these steps are intended to help foster sustainable growth, "critics are wary of greater government intervention in logistical production decisions and caution that politicizing decisions about developing the fields could backfire," write Kay and Graefe.

Importantly, Brazil must avoid the so-called "resource curse," a phrase describing a frequent occurrence in resource-rich economies—their growth rates tend to be lower than those in countries without such resources. To learn more about the challenges and opportunities awaiting Brazil as it develops its oil reserves, read the full story in the first-quarter issue of EconSouth.