Lula’s Oil Dream

Lula’s Oil Dream
September 17, 2008
Alvaro Vargas Llosa

SAO PAULO, Brazil—In the United States, offshore drilling is so controversial that it has become the stuff of heated presidential campaign debate. But in Brazil, it is so popular that everyone wants a piece of it. The Tupi oil field, an underwater formation discovered in Brazil’s Santos Basin at the end of last year, contains some of the world’s largest known reserves. And it is fast eroding some myths about Brazil.

The Brazilian government owns the majority of the voting shares in Petrobras, the company that discovered Tupi, but about 60 percent of the total shares are traded publicly. President Luiz Inacio Lula da Silva and his supporters are not happy with the idea that Petrobras should get its hands on the Tupi reserves because much of the profits would go to private investors. They want a new state-owned energy company to own and exploit those reserves.

When Petrobras complained and experts explained that the government does not have the capital or the know-how required for this enterprise—a huge technological challenge given that the crude is tucked underneath a salt layer about 6,000 meters below the surface, Lula modified his plan slightly. He is now considering creating a state company that would not operate the fields but merely administer them, dishing out contracts to private companies and to Petrobras, and paying a fee or letting them keep a share of the output. This would ensure that most of the money goes toward “education and the fight against poverty”—i.e., to the government’s coffers.

Three myths have been demolished in the course of this debate.

As the country that produces more than 40 percent of the world’s ethanol used as fuel, and where no light vehicle runs solely on gasoline, Brazil was described as a model for the future. It turns out that Brazilians are just as hooked on oil as any other nation with that highly valuable resource. Because oil had been a government monopoly since the 1950s and had been operated by a pachydermic state-owned company, the country’s reserves were thought to be relatively insufficient. When Petrobras’ monopoly was ended by President Fernando Henrique Cardoso in 1997, oil exploration made headway. It was a matter of time before major new fields were discovered.

The second myth that has been shattered is that Lula, the icon of the modern left, has shed all of his youthful socialist inclinations. He is, by Latin American standards, a modern leftist. But the Tupi debate underscores that he believes in the concentration of power more than he believes in the free market. Yes, he understands the importance of foreign investment—which is why Brazil attracted $35 billion worth of foreign capital last year, one of the reasons why the middle class now comprises, according to the Getulio Vargas Foundation, 52 percent of the population. But public spending is at a record high and the government has turned BNDES, the Brazilian Development Bank that funds a good part of the country’s industrial development, into a powerful mercantilist tool that picks winners (for instance, naval companies) and losers. The mess that is Brazil’s political system means that even in these times of economic boom, total investment represents about 18 percent of the country’s GDP—small fry compared to China’s 47 percent in its best days.

The last myth left in tatters is the notion that Brazilians had finally settled on an economic model because with Lula’s preservation of the reforms inherited from Cardoso, the left and the right were finally in basic agreement about the need to devolve responsibility to private enterprise. There is still a fundamental division between those who believe in social engineering and those who believe in individual responsibility. In times of bonanza, such as this one, the issue seems of little consequence because there is an abundance of capital, the government is cashing in and 12 million poor families are receiving stipends from the state for poverty alleviation.

But the difference between countries that prosper and those that don’t is not that the former do well when commodities sell at high prices. Rather they are able to sustain substantial capital accumulation over a long period of time—regardless of the fortunes of their natural resources.

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Alvaro Vargas Llosa
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Alvaro Vargas Llosa is Senior Fellow and Director of The Center on Global Prosperity at The Independent Institute. He is a native of Peru and received his B.S.C. in international history from the London School of Economics. His weekly column is syndicated worldwide by the Washington Post Writers Group, and his Independent Institute books include Lessons From the Poor: Triumph of the Entrepreneurial Spirit, The Che Guevara Myth: And the Future of Liberty, and Liberty for Latin America.

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