Tuesday, September 2, 2008

Brazil Devolves Into Socialist Circus

The Socialists in Brazil are doing their best to scare foreign investment away from Brazil so that Brazilians are never allowed to participate in the global economy. Hopefully Brazil won't join the ranks of Russia and Venezuela: Brazil Pumps First Pre-Salt Oil Amid Windfall Debate.

Sept. 2 (Bloomberg) -- Brazilian President Luiz Inacio Lula da Silva boarded an oil platform today to celebrate the first output from offshore deposits he's counting on to speed development and end poverty.

The oil is the first trickle from the so-called pre-salt region containing as much as 50 billion barrels of oil worth $6 trillion at current prices. Located in area is Tupi, the largest discovery in the Americas since 1976. Petroleo Brasileiro SA, the state-controlled oil company, is tapping the well about 560 kilometers (350 miles) northeast of Rio de Janeiro.

Although full-scale production is still years away, Lula's allies in congress are already writing bills to spend the windfall on programs ranging from education to nuclear submarines. Other lawmakers want to revamp Brazil's oil industry to exert more state control and limit foreign involvement. As the fight for cash intensifies, analysts and opposition lawmakers say it may scare off investment.

``We are cooking the omelets with eggs that the hen hasn't laid,'' said congressman Luiz Paulo Vellozo, who heads an opposition panel discussing pre-salt. ``We should not be discussing how to spend the money, but how to get the oil out.'' ...

Petrobras has the most at stake in the regulatory fight. The company has evolved into the world's 11th-largest company with a market value of more than $205 billion, about half the value of Exxon Mobil Corp., the world's the world's largest company, under the decade-old system of oil rights auctions.

``The paradox is that the discovery of pre-salt is the successful culmination of the same model now under threat,'' Carlos Langoni, a former central bank president, said at an Aug. 29 conference in Rio de Janeiro to discuss the new oil laws.

Since July 9, when the price of oil reached a record, the company's shares have tumbled 16 percent to 33.55 reais at 9:10 a.m. in Sao Paulo, almost double the decline in both the Sao Paulo stock market and the New York Stock Exchange Energy Index. The shares are now trading at the lowest levels since before the discovery of Tupi in November.

1 comment:

Anaconda said...


The article posted shows that Socialism is raising its ugly head in Brazil and threatens to kill the goose that laid the golden egg.

How so?

Pre-salt oil exploration and more important production takes capital, lots of it.

Apparently, finding the oil deposits is not the hard part. The hard part is developing the infrastructure to produce the oil in commercial quanities.

"The policy review threatens to slow the $600 billion in investment that UBS AG said in a report will be needed to develop the deep-sea fields. New auctions of exploration tracts are on hold and auctions begun in 2006 were suspended. Companies that won concessions before the halt, including Italy's ENI SpA, Norway's StatoilHydro ASA, and Australia's Woodside Petroleum Ltd., can't begin exploration until the auction process is complete."

It's simple: The oil will not get produced if this "socialist" rant continues.

Brazil is in a different position than most 'nationalized' oil companies. In those countries the oil was relatively inexpensive to produce and the investment was already made (many times, expropriated) and the oil flowing.

With Brazil, the oil is not flowing and it's not clear that it will without substantial investment. Likely, Brazil on its own doesn't have the capital to get the oil flowing.

Threatening to "Socialize" the oil understandably makes investors nervous. Nobody invests unless they think a return on investment will result.

A return greater than other competitive investments available.

Brazil's talk threatens return on investment, hence, no investment will be made in the first place.

In another example, Mexico has seen its oil production decline because of a lack of investment in its exploration & production because of outdated technology and simply by failing to look for added oil discoveries.

This lack of investment is the prime reason Mexico's oil production is declining, not a geological limit.

Socialism has hampered most of the 'nationalized' oil companies' production around the world to some degree or another. How much nobody exactly knows.

Indonesia has seen their oil production decline to the point that they dropped their OPEC membership, even though they were a charter member and their oil geology is excellent and at this point appears underinvested.

Indonesia has the potential to be a leader in oil production not a lackey.

Indonesia didn't have the money to adiquately invest in exploration & production for oil & gas.

Socialism is an exercise in robbing peter to pay paul.

Now, fortunately some in Brazil recognize the threat:

"What we're looking at is creeping expropriation,'' said Marilda Rosado, a former Petrobras and Brazilian Petroleum Agency lawyer in Rio de Janeiro now at the Rio de Janeiro law firm of Doria, Jacobina, Rosado e Gondinho Advogados. 'Investments have already been delayed and probably will slow further.'"

Hopefully, that view will win out in the end or Brazilian oil will not flow and Brazil's economy will be hurt as a result.

The result will be less money all the way around for Brazil.

Now, on one point, it's understandable that Brazil would want to develop competitive support industries for their oil production: "The president is also facing pressure from his party and ex- union colleagues to use the oil windfall to expand Brazil's capacity to build ships and oil rigs, and provide oilfield services."

This is qualified with a big "if," if the investment leads to competitive ship building and oilfield services technology that can compete in the world market.

Taking profit from one successful enterprise and investing it in another enterprise that will offer a return on investment is callled Capitalism.

Nothing wrong with that, particularly if it's in a related industry. Ship building and oilfield services are certainly related to oil production.

But remember it only works in the long term if the new investment ends up being productive, giving a return on investment because it's competitive on world markets, otherwise, its a waste of capital.

The key to capital and Capitalism is that capital investment provides an increase on your initial investment.

Preservation and more important increase of capital is vital to successful Capitalism.

Let's hope for the sake of world oil supplies, Brazil remembers this maxim of Capitalism.

Mexico seems to have forgot, if they ever learned, and look what's happening to their oil production.

Don't kill the goose that laid the golden egg.