Brazil to Reap Short Term Benefits from Falling Oil Prices

CEIC Brazil Data Talk - February 5, 2015 Brazil and its state-controlled oil company, Petrobras, struck liquid gold during 2007 when it discovered a vast amount of offshore oil reserves in the pre-salt layer. The discovery thrust Brazil’s oil reserves to 30.21 billion barrels in 2013 from 20.85 billion barrel in 2007. Partly driven by the new source of oil, petroleum production rose to 745.52 million barrels during the first 11 months of 2014, much higher than its production level during 2007 when it produced 638.02 million. However, the recent fall in oil prices might curb further exploration of the oil reserves due to the high cost of extraction, although falling oil prices might also prove to be a blessing in the short run for Brazil which has been meeting fuel demand through imports, and both consumers and business users will benefit from reduced energy bills. For a country that has among the largest proven oil reserves in the world and growing production of oil, Brazil remains a net importer of oil. Even though Petrobras exports crude oil from Brazil and was a net petroleum exporter of 45.07 million barrels in 2014, it also imports refined oil and petroleum products; (Nigeria is Brazil’s largest oil supplier, followed by Saudi Arabia and Algeria). Brazil’s position as a net importer has been attributed partly to a combination of demand and supply side considerations. Rising motor vehicle ownerships, for example, has intensified demand for oil with Brazil’s vehicle fleet totalling 86.7 million units in 2014, and posting annual average growth of 8.0% from 2002-2014. At the same time, despite high production potentials, Petrobras has struggled to expand capacity to meet this rising demand due to a combination of limited capacity and technological barriers. As such, Brazil suffers from a large fuel-import deficit, paying for USD 33.79 billion worth of imported petroleum, petroleum products and related materials in 2014 in contrast to its exports of USD 20.59 billion. Despite the lower external receipts from crude oil exports, Brazil would stand to enjoy a net gain from the lower cost of its petroleum imports. Falling oil prices would also benefit Petrobras in the short-run, given that it has been selling imported fuel to the public at a government-controlled price that is kept low as a measure to control inflation even during times of high oil prices. The government’s enacted fuel price policies have been implemented at the expense of the oil firm, partially leading to diminishing returns for Petrobras during the past few years. Selling at controlled prices became a financial burden for Petrobras’s downstream business segment when it incurred a net loss for 14 consecutive quarters from the first quarter of 2011 through to mid-2014, largely due to the higher cost of goods sold which lowered its gross profit. As such, Petrobras’ consolidated net income fell to BRL 23.01 billion in 2013 from BRL 35.90 billion three years ago and is likely to have done so again in 2014. Despite the strong performance by its exploration and production segment which enjoyed a net profit of BRL 42.27 billion in 2013, up from BRL 19.29 billion three years ago, the loss-making downstream segment and the weak contribution by the rest of its business segments offset the potential gains for Petrobras. Thus, the lower world prices would allow some breathing space for Petrobras, especially its downstream segment which will benefit from the lower cost of petrol given the inelastic domestic retail oil price. Brazil and Petrobras should take advantage of this period of low oil prices to solve their refining production constraints while continuing to make use of foreign oil as a stop-gap solution to meet domestic demand. Once the refining capacity is raised, they would be able to capitalize on their large crude oil reserves, in turn raising production in the country. This would reduce Brazil’s dependency on foreign oil and its susceptibility to the oil price increase which is expected to rebound in the future. By Bruno Vasconcelos - CEIC Analyst Discuss this post and many other topics in our LinkedIn Group (you must be a LinkedIn member to participate). Request a Free Trial Subscription. Back to Blog
5th February 2015 Brazil to Reap Short Term Benefits from Falling Oil Prices

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