Oil spike: pros and cons for Brazil

Brazil’s approaching status as a major oil producer suggests higher oil prices should be cheered in the country.

But the short-term impact could be less welcome. This is not because of inflation: the prices of fuel and other refined products are controlled in Brazil. But if expensive oil causes economic pain around the world, that will hit demand for Brazil’s commodity exports.

Brazil declared self-sufficiency in oil in 2006 but it must still import fuel and other products because of a shortage of refining capacity at home.

Petrobras, the national oil company, ends up bearing the cost of controlled prices because it has to forego the higher revenues it would make by selling its oil at market prices.

Sérgio Gabrielli, president of Petrobras, said on Tuesday that rising prices were being caused by speculation and there were “no fundamentals that justify a lasting upward trend”.

That may sound overly optimistic now but, in the long term, higher prices would be good for Petrobras as they would help it finance its ambitious $224bn investment programme for 2010 to 2014. The company has already had to return to capital markets after its record-breaking $70bn share issue last September. Higher oil prices would encourage investors to back its plans.

But for Brazil as a whole, expensive oil could hurt. “This situation creates a lot of worries for Brazil because a fall in prices of other commodities would have a direct impact on our exports,” according to José Augusto de Castro, head of Brazil’s exporters’ association. “Our surplus could turn into a deficit.”

That is cause for concern. Brazil is expected to run a trade surplus of $10bn to $15bn this year. But its current account is negative by about $60bn. Wipe out the trade surplus and concern would turn into rising alarm.