BRAZIL BATTLES THE "OIL CURSE"

October 8, 2009

Ever since the Brazilian state energy company Petrobras struck oil in giant fields deep below the floor of the Atlantic, the mood in Brasília has been practically euphoric.  The discovery may produce 80 billion barrels of oil for Brazil, but beating the "oil curse" -- an affliction visited on oil-rich nations from Africa to Asia, where a glut of petrodollars guts industries, warps politics, fuels tyrants and leaves the poor even poorer  -- remains a key requisite to profiting from the find, says Newsweek. 

There are, however, reasons for hope for Brazil, says Newsweek:

  • The country has managed past discoveries well.
  • The country's current regulatory model is well respected within the oil industry.
  • The model guarantees competition by auctioning concessions to private companies.

But a new law -- now before Congress -- would replace the existing model with "production sharing," a model favored by autocratic governments, a model favored by Saudi Arabia and Venezuela, says Newsweek:

  • The law grants state oil company Petrobras a 30 percent stake in all new deals.
  • The government would also retain veto power over all drilling contracts, leaving it and not the market to pick winners.

Brasilia agues that taking the reins of the accounts will help the country avoid drilling too much oil too quickly, but the belief is rooted on the belief that bureaucrats make good businessmen.  Brazil has been down this road before and the result was waste and slower growth, says Newsweek.

Source:  Mac Margolis, "Brazil Battles the 'Oil Curse,' Newsweek, October 12, 2009.

 

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