Brazil could become one of the world’s top 4 oil producers

. Nov 04, 2019
How Brazil could become one of the world's top 4 oil producers Photo: Leo Francini

Good morning! This week, we’re covering Brazil’s upcoming massive oil auctions. 600 days since the Marielle Franco murders. Brazil’s unemployment rates. (This newsletter is for platinum and gold subscribers only. Become one now!)

How Brazil could become one of the world’s top 4 oil producers

On Wednesday, the Brazilian government is set to auction off exploitation rights to the

so-called &#8220;<a href="">Transfer of Rights</a>&#8221; oil fields—a series of massive deepwater reserves containing up to 16 billion barrels. The licensing auction alone is set to raise BRL 106 billion, with an additional BRL 1.7 trillion expected to be invested in infrastructure, research, and innovation by 2030. According to the most optimistic projections, Brazil&#8217;s oil and gas output should double within the next decade—which could make the country the world&#8217;s fourth-largest oil producer.</p> <p><strong>Why it matters.</strong> Despite the advances of renewable energy, oil and gas will remain the world&#8217;s top energy sources until at least 2040. The government wants to cash in while oil remains as valuable as it is.</p> <div class="flourish-embed" data-src="visualisation/866693"></div><script src=""></script> <p><strong>History.</strong> The reserves in question have been at the center of a legal imbroglio between Petrobras and the federal government since 2010. At that time, Petrobras paid BRL 74.8 billion to exploit 5 billion barrels of oil in pre-salt areas. Later, however, it was discovered that the reserves were much heftier than initially thought—storing up to 16 billion extra barrels, according to some estimates. It is this surplus that will go up for auction on Wednesday.</p> <p><strong>Financial relief.</strong> Of the BRL 106 billion to be raised on Wednesday, BRL 21.9 billion will be distributed to states and municipalities. They will be able to use the cash to lower pension system deficits and pay for investments. As many of these administrations are in dire financial straits, mayors and governors see the transfer of rights auction as a lifeline.</p> <p><strong>What to do with the money?</strong> The federal government will get BRL 50 billion from the auction, which will &#8220;revitalize the country,&#8221; per Economy Minister Paulo Guedes. But the government has not been transparent about where the money will be invested. There are a few positive examples from countries with massive natural resources:</p> <ul><li><strong>Create a sovereign fund:</strong> Norway and Saudi Arabia.</li><li><strong>Give oil money a specific destination:</strong> Chile.</li><li><strong>Investing in infrastructure, education, and industry:</strong> Dubai and Malaysia.</li></ul> <p><strong>Past failures. </strong>When the pre-salt area was discovered, Brazil created a fund in 2010 that would invest in healthcare and education. But a decade has gone by without any guidelines being approved. The result is that those BRL 33 billion are sitting unused.</p> <p><strong>Perils.</strong> Experts say that the oil and gas industry will create more jobs and generate more investments than any other sector of the economy. The country, however, must use the inflow of cash to diversify its economy to avoid an over-exposure to the volatility of oil prices. During the commodities boom of the early 2000s, Brazil&#8217;s over-reliance on basic products made the economy extremely vulnerable to a decrease in demand.</p> <script src="" type="text/javascript" charset="utf-8"></script> <hr class="wp-block-separator"/> <h2>Marielle Franco murders: 600 days and countless blunders</h2> <p>Today marks the 600th day since the assassination of Rio City Councilor Marielle Franco and her driver, Anderson Gomes. In recent times, no other political crime has had a higher profile. And yet, the investigation has been a cautionary tale on what <em>not</em> to do when it comes to police work.&nbsp;</p> <p>In the latest blunder, the police leaked a deposition supposedly linking President Jair Bolsonaro to the crime—only for the information to be debunked by prosecutors hours later.</p> <p><strong>Why it matters.</strong> It is believed that Ms. Franco was murdered by armed militias acting in Rio de Janeiro—and that state agents were involved.</p> <p><strong>Who did it?</strong> Two suspects—both of whom are former police officers—have been arrested for allegedly carrying out the hit job on Marielle Franco. Investigators also suspect that members of a death squad called &#8220;The Office of Crime&#8221; were involved—but no charges against them have been filed.</p> <p>Nobody has been indicted for ordering the assassination, but federal prosecutors are investigating one former state lawmaker and a former member of Rio&#8217;s State Accounts Court (an anti-corruption body) with ties to organized crime.</p> <p>Back in September, the Federal Prosecution Office asked for the case to be transferred to the Federal Police, believing that Rio&#8217;s police department has neither the skillset nor the independence to close the case. The Superior Court of Justice is analyzing the request.</p> <p><strong>Many, many mistakes.</strong> The list of basic errors in the investigation is long, contributing to the excessive delays in reaching a conclusion to the highest-profile criminal case in the country right now.&nbsp;</p> <ul><li><strong>Crime scene. </strong>Police officers at the crime scene didn&#8217;t take depositions from two eyewitnesses. Instead, they asked people to clear the scene and go home. Only after the press revealed this fact, weeks later, did the cops look for these witnesses.</li><li><strong>Weapon. </strong>There were errors in the initial expert examinations. 9mm shells were found at the crime scene, and investigators determined that a 9mm pistol with a silencer had been used in the crime. Only later did the police consider the use of a machine gun (used by police forces) as the murder weapon.</li><li><strong>Images. </strong>Several security cameras on the street were inactive on the day of the crime. But the police also managed to lose some of the images it got from private cameras, due to poor handling of video files, which weren&#8217;t recorded in the correct file format.</li><li><strong>False leads.</strong> In May 2018, a man declared that a former police officer and a Rio city councilor had killed Marielle Franco. The deposition was later discovered as false, and the Federal Police started to investigate tampering with the case. That&#8217;s how, in February 2019, marshals reached Domingos Brazão, the former member of Rio&#8217;s State Accounts Court.</li><li><strong>Bolsonaro.</strong> The alleged trigger man is a neighbor of President Bolsonaro&#8217;s. A leaked deposition of the doorman to the gated community in which they both live suggested the driver of the getaway car visited Mr. Bolsonaro just hours before the crime happened. But the politician was in Brasília on that day.</li></ul> <hr class="wp-block-separator"/> <h2>Markets</h2> <p>Political turbulences haven&#8217;t disturbed the Brazilian stock exchange. Investors have their eyes on this week&#8217;s mega oil auction and are waiting for President Jair Bolsonaro to present the government&#8217;s post-pension reform agenda this week. On Friday, the <a href="">São Paulo benchmark stock index </a>reached new record highs, closing the day at 108,196.</p> <hr class="wp-block-separator"/> <h2>Unemployment down—but jobs get increasingly precarious</h2> <p>Brazil&#8217;s unemployment rate has gone down by 0.7 percentage points, dropping for the fourth consecutive month. Still, over 12.6 million people are looking for a job in Latin America&#8217;s biggest economy. Informal labor and self-employment have been the drivers of the slow-but-steady fall in unemployment rates. This produces more precarious jobs, however, without social security benefits. Underemployment rates (which also encompasses those out of the workforce) reaches one-quarter of Brazil&#8217;s workers.</p> <div class="flourish-embed" data-src="visualisation/867194"></div><script src=""></script> <hr class="wp-block-separator"/> <h2>Looking ahead</h2> <p><strong>New reforms.</strong> Following the pension reform, Economy Minister Paulo Guedes is set to present a series of reform proposals, including a change in how tax revenue is split between federal-, state-, and municipal-level administrations. He also wants to remove many of the perks enjoyed by civil servants—who earn, on average, 96 percent more than private-sector workers. While Congress is unlikely to start analyzing any of these proposals in 2019—the move could be good enough to excite investors.</p> <p><strong>Inflation.</strong> On Thursday, the Brazilian Institute of Geography and Statistics will release the official inflation rate for October. Economists surveyed by the Central Bank expect the rate to be at only 0.08 percent—following a 0.04-percent deflation in September. If confirmed, we would see the lowest inflation rate for the month of October since 1998. With high unemployment rates, Brazilian families are consuming less—which has held prices somewhat stable.</p> <p><strong>Eduardo Bolsonaro.</strong> Tomorrow, opposition parties will file an impeachment request against Congressman Eduardo Bolsonaro, who defended that his father should repeat the same methods used by the military dictatorship to fight opponents. The accusation is that Mr. Bolsonaro broke parliamentary decorum by defending the return of the AI-5, a legal instrument created in 1968 to legitimize political persecution and state-sponsored torture. Whether or not the political establishment will pursue action against the president&#8217;s son remains to be seen.</p> <p><strong>Supreme Court.</strong> On Thursday, the country&#8217;s highest court will resume its so-called &#8220;trial of the year.&#8221; Justices will determine whether or not prison sentences can be carried out before all appeal routes are exhausted. With Chief Justice Dias Toffoli being expected to cast the deciding vote, most observers bet on a reversal of the current understanding, in favor of allowing defendants to pursue appeals at liberty. The ruling should see the release of former President Lula—and is sure to infuriate supporters of President Bolsonaro.</p> <hr class="wp-block-separator"/> <h2>In case you missed this</h2> <p><strong>Oil spill.</strong> The Federal Police believe to have identified the culprit for the massive oil spill that has damaged over one-third of Brazil&#8217;s coastline: a <a href="">Greek oil tanker named Bouboulina</a>. The vessel left Venezuela for Malaysia and was close to the Brazilian coast at the moment authorities believe the spill happened. The company that owns the ship denies any wrongdoing. Over 1,000 tons of pollutants have been removed from Brazilian shores. However, in one-third of locations, oil stains resurfaced even after cleaning efforts by authorities and local volunteers.</p> <p><strong>Interest rates.</strong> Brazil’s benchmark interest rate has reached a new all-time low: 5 percent per year. The move could bring a sort of revolution in the country: forcing investors to take more risks. According to economics professor Paula Sauer, of the São Paulo Advertising and Marketing School (ESPM), over BRL 2.1 trillion is currently allocated in fixed-income funds. With historically low interest rates, however, these investments have almost entirely lost their profitability. At current rates, a BRL 1,000 deposit in a savings account would be worth just BRL 998 after 12 months.</p> <p><strong>Foreign investments. </strong>After a meeting with Saudi Crown Prince Mohammed Bin Salman, Mr. Bolsonaro announced that Saudi Arabia’s Public Investment Fund would invest USD 10 billion in Brazil—mostly in infrastructure. According to OECD data, Brazil has attracted USD 28 billion in foreign direct investment over the first six months of 2019—making the country the fourth-biggest receptor of foreign money among G20 members.</p> <p><strong>Pantanal fires. </strong>Data from the National Institute of Space Research (Inpe) shows that the number of fires in the Pantanal biome so far in 2019 is 462 percent higher than last year. 2018 was a quiet time as far as Pantanal fires were concerned, with only 1,507 cases. This year, with two months remaining, the region has already seen 8,479 blazes.&nbsp;

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