Dealing with plenty: Brazil in the era of surplus oil

Abstract

This is a study about the growth of oil industry and its economic and political repercussions in Brazil. It combines an industrial analysis with an empirical assessment of the impact of oil royalties on municipal fiscal transparency in Brazil. This paper begins with an overview of the future of the oil industry and fleshes out what Brazil’s role in this future might be. I show that hydrocarbons will continue to be the main source of energy for the foreseeable future. Despite the negative issues associated with oil, such as its pollutant qualities and abundance in politically unstable countries, its versatile nature and features as a fuel discourage a switch to alternative energies, a very arduous endeavor under present technological constraints. Next, opposing views regarding the dominance of oil are presented. Some scientists defend that oil production has or is about to peak, while others claim that there is plenty of oil left in unconventional sources, such as tar sands, shale rocks, and offshore oil. This latter source is of particular interest to this study. In 2007, the Brazilian government announced the discovery of huge reserves offshore, reserves with the potential to multiply the country’s oil assets. Brazil emerges in the 21st century as an important supplier of oil, a fact celebrated by President Barack Obama in his first visit to the country, when he offered his willingness for the U.S. to be the main customer of such fuel. For most of its history, Brazil needed to import oil to supply its internal demand. Despite that, this country adopted policies that highly restricted foreign participation in this industry. I show how nationalism played a major role in shaping Brazil’s oil legislation from the 1930’s until the mid-1990’s, when a more liberal legal framework opened the domestic market for oil exploration. The liberal legislation successfully achieved an increase in production and reserves. Additionally, the mid-1990’s legislation also raised the existing rate of oil royalties and created new taxes. The combination resulted in petroleum wealth appearing as a significant source of public revenue, especially at the local government level. Oil abundance, if not properly managed, can be harmful to economic development. This outcome is counterintuitive but supported by an empirical regularity in cross-country comparisons. In Chapter 2, I present the main arguments attempting to explain the so-called resource curse paradox, a theme extensively studied in development and political science literature. I show that while there is no inherent contradiction between resource abundance and development, there are indeed economic and political challenges. Economically, there is a need to avoid the loss of competitiveness in the non-resource sector of the economy, a phenomenon named Dutch Disease. The existence of oil wealth can also pose a threat to development through political mechanisms. It stimulates rent-seeking behavior and reckless fiscal spending, and it makes reform harder to accomplish. Chapter 2 also contains a brief analysis of the experiences of Norway, Venezuela, and Mexico in managing oil resources. In Chapter 3, I assess the impact of oil money transfers to municipalities in their compliance with the transparency requirements of the Fiscal Responsibility Law. In 2000, the Brazilian government adopted a law that requires, among other things, that every municipality submit its fiscal data to the central government. If a municipality declines to provide the data, it is penalized with refusal of voluntary transfers from the Union and contracting credit operation. I analyze the pattern of missing information using logit models with fixed effects and pooled data, for 5,561 municipalities in a ten year period (2000 to 2009). The results compellingly illustrate that being an oil recipient increases the probability of breaking the law by up to 16 percentage points. The model also indicates that structures of checks and balances, like a high voter turnout, encourage more transparent behavior. Consistent with the literature, the models likewise exhibit that the more a municipality is financed by transfers of money, the less the municipality is accountable. Chapter 4 concludes by pointing to the importance of the findings, particularly when oil revenues, with the recent offshore discoveries, are becoming a major source of public money to all governmental structures in Brazil.

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