The Brazilian oil boom – is it real or bubble ?

The oil boom which once led to the rise of the gulf states has now finally reached the crown of Latin America-  Brazil ! It was earlier estimated that Brazil has 20000 million barrels of oil reserves, however now it has been re-evaluated as 50000 million barrels- a whopping 2.5 times increase and leading to what many consider as the oil bubble of Brazilian economy.

Brazil, part of BRIC nations, is the largest country in South America and is a net exporter of goods with trade surplus on year to year basis. The discovery of such vast oil reserves can actually realize Brazil’s dream of emerging as a super power in the coming decade as it seeks a permanent seat on the UN security council. Moreover, it is even more significant as US which is the world’s largest importer of oil seeks to reduce its dependencies on gulf states and source oil entirely from Canada, Mexico and  Latin America.

Most of the oil reserves of Brazil are along the eastern coast near the existing oil fields. Petrobras, Brazil’s state owned oil company, is planning to invest as much as 225 billion USD by 2015 in deep sea oil exploration. In fact almost 60 % of all industrial investments in Brazil’s economy is occurring in the oil sector. The scale of such high investments is apparently going to create a labour blackout due to shortage in skilled labour . However, Petrobras is upbeat and believes that in ten years time its gamble is going to pay off making Petrobras even larger than Shell. However, for its current funding it is consistently selling shares to the government and trading in oil versus shares. Brazil’s oil industry does not allow private players to enter the market though it is leading to creation of lot of enterprises that focus on making equipments for deep sea drilling.

Brazil’s oil reserves are located at 7000 km below sea level which is much deeper than oil found in gulf of Mexico and north sea. This implies that there will be high cost involved in this exploration as compared to others while at the same point of time the estimates of the reserves may not be accurate. So can the bubble burst? There is definitely a possibility.

Now what happens if oil discovered actually meets the estimates-  Brazil will emerge as the fifth largest exporter of Oil in the world by 2020 and will contribute 10% of the world’s oil production. Moreover oil prices are expected to reach $300 per barrel by 2020 thereby leading to tremendous gains for the Brazilian economy and further increase its trade surplus. Brazil will be supplying oil directly to US, while India and China( with a much larger military presence in oil economies) will continue to source it from gulf states. However, a lot remains to be seen whether it is actually achieved by the Brazilian economy, till then let’s keep our fingers crossed.