chapter  7
23 Pages

Brazilian energy independence: petroleum, trade and economic efficiency

ByDONALD V . COES

Introduction The big rise in international petroleum prices that began in October 1973, following the Arab-Israeli War, was the first of several negative “supply shocks” that hit the economies of major developing nations like Brazil. In the mainstream economic interpretation of this kind of event, such a supply shock lowers the level of real economic activity or slows its rate of growth and raises both the price level and the rate of inflation. The first shock, and the subsequent one of 1979-1980, clearly had such effects in Brazil. Real GDP growth rates, which had averaged more than 11 percent between 1968 and 1973, fell to a little more than 6 percent for the rest of the decade. Rates of inflation more than doubled after the first shock, and then more than doubled again after the second shock. In retrospect, while Brazil’s long period of macroeconomic instability in the two decades after 1974 may have been primarily home grown, it was clearly aggravated by these external oil shocks. It is therefore quite understandable that Brazil’s macroeconomic travails in the last quarter of the twentieth century continued to influence policy-making in both the Cardoso and the Lula governments. Although the focus of the 1994 Plano Real was on domestic stabilization through a credible fiscal policy and monetary reform, the reduction in vulnerability to external shocks is an important element in making Brazil’s macroeconomic environment less volatile than it once was. Petroleum independence is only one part of a larger group of issues that might be grouped under the rubric of “energy independence”. Among the other sources of energy that are of potential importance in a Brazilian context are hydroelectric and nuclear power, as well as less technologically mature sources like solar energy, wind power, and renewable biomass sources such as alcohol. All of these potential saviors have attracted much attention, both in the Brazilian and foreign press. None of them, however, have had an impact on Brazil’s external payments comparable to that of petroleum. There are two basic reasons for this. First, several of these potential energy alternatives to petroleum, such as solar energy or nuclear power are basically “non-tradable” activities. As such, their links to Brazil’s external payments are primarily indirect, through their potential

substitution for a highly tradable good like petroleum. Second, despite increasing interest in these alternatives and substantial technological progress in Brazil in developing them, their macroeconomic significance for Brazil has been much less than have been trends in the international petroleum market. For this reason, the focus of this chapter is on Brazilian economic independence in petroleum, with some attention given to the potential substitution effects of alternative energy sources. It begins with an examination of the major trends in petroleum production, consumption, and external dependence in three phases: (a) prior to the first oil shock, (b) from 1973 to the Plano Real and the liberalization of the petroleum market in the 1990s, and (c) since the 1994 reforms. It shows that most of the reduction in trade vulnerability came from the production side, rather than from a slowing of the growth in energy consumption. The section following then presents a simple model of foreign energy dependence, which distinguishes between short and longer run outcomes. It suggests that economic efficiency in energy use may be constrained both by past energy investment policies and by future trends in energy costs and technologies. The chapter concludes with a brief examination of some of the choices that may be faced in developing an economically efficient policy.