Brazil, the land of carnival, samba, soccer... and oil. Indeed, VisualPolitik community,
Brazil is not only the cradle of the Amazon, the lungs of the planet, but also one of the
world's largest oil producers, as well as the largest producer in all of Latin America.
In fact, in 2022 Brazil produced more than 4% of all the oil extracted in the world. Therefore,
it is not surprising that it rubs shoulders with major oil producers in the Middle East such as
Kuwait, Iran or the United Arab Emirates. Even so, Brazil is not only constantly on
the lips of analysts because of its strong oil position. Less than a year ago, Latin
America's largest economy made headlines around the world because of this news:
(Brazil presidential election: Lula defeats Bolsonaro by thin margin. – Irish Times)
Indeed, Lula, who has been considered by many as the rockstar of the left in Latin America,
returned to power by a very narrow margin in the elections against the already former
president Bolsonaro, Trump's ally who also failed to extend his mandate.
And, as many of you will remember, this also caused one of the most unfortunate incidents
in Brazilian history: a bunch of citizens unhappy with the outcome took a cue from the United States
and stormed the nation's Congress. However, they achieved little more
than being arrested and some were injured, because the reality is that Lula had won,
and in January of this year he assumed power. Since then, Lula has emphasized social and, above
all, environmental measures. Therefore, many fear that with this third Lula presidency, the end of
Brazilian oil has come. After all, that is exactly the path followed by Gustavo Petro's Colombia.
The point is that all this has made us on VisualPolitik wonder about a few things:
How did Brazil become an oil power? What role did oil play in Lula's first two presidencies? Will
Lula change his position on oil to comply with the climate agenda? Will this be the beginning of the
end of Brazilian oil? Today we are going to answer all these questions, but first let's take a look
at a bit of history. (A LONG ROAD)
How long do you think it took Brazil to become one of the major oil powers? I'm sure many of
you will think that as soon as oil was found, money started pouring in from all directions.
But the reality is that, like Rome, oil-producing Brazil was not built in a
day. The road to becoming one of the 10 largest oil-producing powers was full of failures and,
above all, it was very long: more than a whole century since its first oil exploration.
You see, after gaining independence in 1822, the first barrels of oil were not
extracted in Brazil until 1892 with Eugenio Ferreire de Camargo, although only 2 barrels
were extracted. Nevertheless, with this first extraction, the Brazilian State realized the
enormous potential of its subsoil and, at the beginning of the 20th century,
the public initiative joined the private sector in the search for commercial oilfields:
In 1907, the Brazilian government created the Geological and Mineralogical Service of Brazil,
which drilled 60 wells in search of oil, although it was not very successful. However, in 1941,
with the help of the newly created National Petroleum Council, the first commercial well
was finally established in the municipalities of Dom Joao and Agua Grande. But the country's
production was still not abundant: By the end of the 1940s, Brazil was only producing
2,700 barrels per day at a time when its domestic demand was more than 170,000
barrels per day due to the industrialization process the country was undergoing.
Nevertheless, this was to begin to change with the birth of Brazil's major oil player. In 1953,
the Brazilian government founded a company that would shape the State's
monopoly on oil research, drilling, refining and transportation. Petróleo Brasileiro SA,
better known as Petrobras, was born. Many of you already know that today,
Petrobras is Brazil's most important company. But did you know that it spent its
first 15 years of existence being almost totally unproductive? The truth is, VisualPolitik viewers,
it was not until 1968 that Petrobras made its first discovery: the Guaricema field,
although this would seem like nothing compared to the two fields it discovered six years later in
the Campos Basin: the Garoupa and Pargo fields. Now, do you think that Brazil was all set
to become the oil power it is today? Nothing could be further from the truth.
By 1980, Brazilian production only covered 17% of domestic demand. Therefore, that same
year, Joao Figuereido's government set a goal of 500,000 barrels per day of production by 1985.
Yet it was not until the 1995 constitutional reform that the Brazilian oil sector really
began to bear fruit. This reform opened the sector to private competition, lifted
restrictions on the entry of foreign capital and, more importantly, ended the monopoly of Petrobras,
which became a semi-public company with the majority of shares in the hands of the State.
With this change, production increased and Brazil achieved the longed-for oil self-sufficiency in
the early 2000s. However, more than a century had passed since that first,
small oil extraction in 1892, and Brazil was still not in the top 10 of the great oil powers.
But that would change with the arrival of one of the most significant figures in Latin American
politics: Luiz Inácio Lula da Silva. (LULA, THE LUCKY ONE)
In order for your name to go down in politics history, it is often not about
having the best managers, but it is also about being lucky, and Lula, in his first
two presidencies, was lucky. He certainly was. You see, the Brazilian leader, who won his first
presidential elections in 2002, managed to lead Brazil through a period of prosperity,
not so much because of his impeccable management of the economy, but above all because of several
lucky breaks. The most important one? This one: (Brazil discovers country's largest
oil field. – El Mundo) Indeed, VisualPolitik viewers,
in 2007 one of the largest oil fields in the country and in the world was discovered: the Tupi
field. A field with reserves of about 29 billion barrels of oil. This would finally place Brazil
among the 10 largest oil producers in the world. Now, Lula was no fool, the cost was not going to
be low. In 2010 he passed laws so that part of the companies' profits would go to the public
coffers. In addition, it is also true that he benefited Petrobras, with which he signed an
agreement allowing it to exploit and produce up to 5 billion barrels of oil for 40 years.
But even with all this, his luck did not end there. Think about it, Lula came to power in
a time of certain stability. His predecessor, Cardoso, managed to tame inflation and avoid
a major recession. But, most importantly of all, Lula also came right in the middle
of the well-known commodity "super cycle", a time when commodity prices were skyrocketing.
In fact, with the arrival of Lula, the trade surplus went from $10 billion in 2002 to $47
billion in 2007 thanks to the discovery of the oil field and the high costs of raw materials.
So, let's just say it's no wonder that the country grew at an average of 4.5% per year during his
two presidencies. And do you know what he did with all the money he managed to raise? Well, in short,
he extended social programs. Or, to put it another way, he enlarged the size of the State.
Lula launched programs such as Bolsa Familia, which gave monthly aid to the poorest families,
or Hambre Zero, a campaign that aimed to reduce the number of people who were going hungry. And,
to be perfectly honest, they were a great success. As you can see, the percentage of the Brazilian
population in poverty fell by more than 15 percentage points between 2001 and 2011,
both because of the Bolsa Familia program which benefited 12.4 million households, and because of
the increase in the employed population from 77 million to more than 90 million people.
And, not only that, Lula also began to promote measures for the protection of the environment,
particularly against the deforestation of the Amazon. To give you an idea, the area deforested
annually between 2000 and 2005 was 34,700 km2, an area almost equivalent to Switzerland. However,
from 2005 until the end of his presidency, it was reduced to 4,500 km2 per year.
At the time, Lula was tremendously committed to the protection of the Amazon,
but his fight against greenhouse gas emissions caused by hydrocarbons such as oil and gas was
not as strong. Why? For one simple reason: Lula is what is known as an "oil nationalist". And
what does this mean? Basically, he cannot conceive of Brazil's progress without oil.
Nevertheless, 13 years after the end of his second presidency, Lula has returned to the
political scene. It’s a very different political scenario than the one he encountered previously,
for example: today the fight for the reduction of greenhouse gas emissions is much more intense. So,
you might ask, will Lula give in to the demands of the climate agenda to the detriment of his
people? Could we be looking at the end of the oil industry in Brazil? Well, let's take a look.
(LULA'S DECISION)
Lula's return to power was a relief for much of the international community concerned about
Bolsonaro's environmental management in Brazil. It should be noted that he closed several nature
protection agencies, such as the Chico Mendes Institute; he reduced spending on climate change
mitigation policies by 93%, and deforestation was rampant in several parts of the country, such as
Cerrado, the Brazilian savannah. A place where deforestation grew by 34% during his presidency.
Nevertheless, although many have rejoiced at Lula's return, the reality is that the scenario
is not as favorable as in his first cycle: the Congress is dominated by bolsonarists, the effects
of the pandemic are still being felt, especially with a debt that has reached 88% of GDP;
poverty levels are still around 30% and interest rates are stuck at 13.75%, something that has led
Lula to an open confrontation with the Central Bank. And, to top it all off, the country's
growth projections are not the best either: In fact, Brazil is expected to grow more than
half a point behind the rest of Latin America and the Caribbean.
However, against all odds, the Brazilian economy has been a surprise:
(Brazil's economy improves under Lula, defies Central Bank rates
A rebound in Brazil's agriculture and a strong labor market helped
deliver far better results than economists had forecast at the start of 2023. – Bloomberg)
In addition, during these first months of his new presidency, Lula has promoted several reforms
reminiscent of his first two presidencies. For example, he has reopened the Bolsa Familia program
that Bolsonaro closed in 2021 and reinstated the National Food Security Council. Meanwhile on the
environmental front, he reopened the Amazon Fund, signed laws to seize illegally deforested land,
and reopened the Bolsa Verde program, which gives money to poor families
living in traditional communities who are responsible for protecting the environment.
In general, these measures contribute to Brazil's repositioning as a leader
in the environmental struggle. Even so, the question many are asking is,
is Lula willing to emulate Gustavo Petro, to go one step further and do away with national oil?
Well, the truth is that the chances of Lula sacrificing the Brazilian oil
industry to achieve this goal are rather low, if not non-existent.
(Lula described Gustavo Petro's proposal to suspend oil production as "unreal".
Former Brazilian president Luiz Inácio Lula da Silva assured that the use of hydrocarbons
is still necessary in the world and gave as an example the situation in Germany. – InfoBae)
In fact, if Lula has already managed to place Brazil among the world's top 10 oil producers,
his goal now is to make it the world's fourth largest producer. For this reason,
Petrobras expects to increase daily production from 3 to 5 million barrels by 2030.
And, not only that, the Brazilian oil giant is also trying to get a license to be able to drill
in the Amazon basin, in an area where there are estimated reserves of up to 30 billion barrels of
oil and where it is willing to invest $6 billion in exploration alone over the next five years.
Added to this is the fact that, between 2022 and now,
Brazil has approved the largest number of oil and gas projects,
behind only Saudi Arabia and Qatar. And this is not so unusual, just remember
that projections indicate that Petrobras will provide more than $200 billion in revenues to
the State coffers in the next five years. $200 billion… that Lula is counting on to
carry out his social policies. You see VisualPolitik community,
it does not appear that Brazil is going to break with its oil tradition with Lula. In reality,
it seems that exactly the opposite will happen, his oil gamble will become even stronger.
Yes, it is true, he has restored initiatives to fight against factors contributing to
climate change, such as deforestation, but oil exploitation in Brazil seems non-negotiable,
especially if Lula wants to maintain his social spending. Of course,
the environment is one of Lula's priorities,
but, at the end of the day, petrodollars continue to dominate the scale of priorities.
But, at this point, the questions are now over to you: do you think Lula will ultimately reduce
the influence of the oil industry in Brazil? What position did you think Lula had on the oil
industry? You can leave me your answer in the comments. As always, don't forget that here on
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