Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World (37 page)

Unlike other instances of shifts to a colder climate, the Little Ice Age in Europe did not precipitate the collapse of complex societies and a descent into a dark age. As discussed in Chapter 4, instead of collapsing, Europe expanded and acquired energy subsidies through colonies, and also started using energy-dense coal to power the Industrial Revolution. The surge in energy led to unprecedented growth in the mid-eighteenth century; growth that parallels the later growth from peak coal before World War I to peak oil in the nineteenth century. However, realizing there may not be a higher density energy to exploit in the coming years, the collapse of the advanced economies like the United States is imminent. By contrast, the fortunes of Brazil will not be as deeply dented by peak oil as will be economies that import large percentages of the oil they use—at least for now and depending on Brazil's overall, future energy strategy. In 2012, Brazil was the world's eleventh oil producer, and it is poised to become one of the top five oil-producing countries by 2020, as oil prices soar.

At the beginning of this chapter, I quoted the chairman of the Natural Resources Committee of the U.S. House of Representatives, Representative Doc Hastings, as claiming that Brazil's offshore oilfields contain “a combined 58 billion barrels of oil.” A report by Bloomberg filed January 19, 2011, suggests that Representative Hastings was being conservative. He may have underestimated Brazil's presalt oil reserves by half. Bloomberg reported that, “Brazilian oil deposits below a layer of salt in the Atlantic Ocean hold at least 123 billion barrels of reserves, more than double government estimates.”
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The Bloomberg report was based on a university study that set out to show that the Brazilian government's reserve estimates were too optimistic, but reached the opposite conclusion, putting a 90 percent probability on the 123 billion barrel reserve estimate. That is a high level of confidence. Whether or not it proves true, Petroleo Brasileiro SA, or Petrobras (NYSE: PBR) has already done more than any other oil company to discredit peak oil. Whether the new offshore reserves amount to 123 billion barrels, 58 billion barrels, or only 33 billion barrels of oil, as optimists in Brazil's Energy Ministry hinted for several years, the find would still be the largest oil find in three decades and one of the largest in history.

Note that those who resist the notion of peak oil point to the presalt discoveries to underpin their hope that world oil production will not decline. But Sergio Gabrielli, the CEO of Petrobras, has put the world's prospective oil deficit in perspective. In a presentation in December 2009, he showed world oil capacity, including biofuels, being unable to offset world oil decline rates. Gabrielli stated in his presentation that “
the world needs oil volumes the equivalent of one Saudi Arabia every two years to offset future world oil decline rates”
(emphasis added).

In a January 2009 interview with
BusinessWeek
, Gabrielli suggested that the company's internal projections were slightly more optimistic. He said,

according to the company's projections, production from existing fields will fall from a little over 18 million barrels a day to maybe half of that even if new techniques are used to slow the rate of decline. So just keeping global production flat is going to require lots of new fields and
requires the world to replace one in Saudi Arabia per three years
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(emphasis added).

In fact, if the 123 billion barrel estimate proves correct, Brazil's new presalt fields would be larger than even Saudi Arabia's massive Ghawar Field, thought to have contained 100 billion barrels before production began in 1951. Since then, an estimated 65 billion barrels of oil have been produced at Ghawar. If Brazil's presalt production province proves to be even half as productive, it would guarantee Brazil's emergence as one of the world's preeminent energy powers. That is the role Brazil seems destined to fill, even with much more modest success in exploiting its deep offshore energy resources.

According to
Forbes
, the world oil and gas industry is converging on Brazil in a big way, with the intention of investing an estimated $1 trillion exploring and drilling for oil there. Petrobras alone is scheduled to invest $224.7 billion over five years drilling and producing oil from the presalt region deep off the coast of Rio de Janeiro.
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Some investment analysts have suggested that if Petrobras succeeds in its production targets, it could become the first public company worth $1 trillion. Petrobras already accounts for 22 percent of the world's deep water oil production. Its presalt investment program is projected to push annual production to 3.9 million barrels of oil by 2014. And natural gas production is also expected to reach 130,000,000 cubic feet per day by the same year. Company projections call for production by 2014 to bring annual sales to almost $250 billion, with profits exceeding $30 billion. Similar growth is projected for the following four years. If reached, analyst Ryan Fuhrmann, projects that “Petrobras has a good chance at having a market cap of $1 trillion” within the decade.
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The Petrobras story is a component in the bright future of Brazil. Its $224 billion investment plan is just the first installment in over $1 trillion of investment in the next 10 years to develop vast offshore oil deposits.

“This could be the largest private-sector investment program in the history of mankind—more than actually putting a man on the moon,” says Pedro Cordeiro, head of the oil and gas practice at Bain & Company consultancy in São Paulo.
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On an inflation-adjusted basis, this is a greater sum than the Marshall Plan that rebuilt Europe after World War II.

As reported in
The Economist
, the early indications encourage optimism that Brazil will succeed in bringing in vast quantities of offshore oil and gas. Gabrielli proclaimed, “[I]n the presalt area, our exploration has a success rate of 87 percent compared with a world average of 20 percent to 25 percent for the industry.”
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The vast oil deposits will compound the growing prosperity of Brazil. The expensive oil that will be extracted will make Petrobras one of the world's more important and profitable companies. Remember, before 1995, when the dot-com boom skewed historic investment statistics, the oil industry earned a higher rate of return on invested capital than any other industry. That was during a period when oil was generally cheap and its real price only briefly rose above $40 in today's terms. Petrobras will be earning returns at $200 to $300 per barrel. The profits should overshadow anything earned by oil companies in the past. Note that Petrobras is not the only Brazilian oil company expecting to bring in vast amounts of production from offshore fields. OGX Petroleo e Gas Participacoes, the oil group controlled by Brazil's richest billionaire, Eike Batista, forecasts that it will produce 1.4 million barrels a day by 2020, which would account for about one-quarter of Brazil's projected production.

Brazil became a net oil exporter in 2009, after investing lavishly in domestic oil and gas exploration for decades. In 2012, Brazil's oil production was running at about 3 million barrels per day. Credible plans call for output to expand to 5.5 million barrels per day by 2020. About 1.5 million barrels a day will initially be earmarked for export.

Brazil may be able to reduce rather than increase its internal oil consumption, even if it grows rapidly between now and 2020 because almost uniquely among the world's economies, Brazil has a growing portfolio of both economic and effective renewable energy.

The grave difficulty that the leading temperate zone economies have experienced in deploying rather than just talking about alternative energy sources testifies to the reversal of the tropical underdevelopment deficit that Jeffrey Sachs highlighted in 2000.

Notwithstanding a drastic 469 percent increase in the real price of BTUs, since 1945 (calculated in terms of the annual average inflation-adjusted price of oil), alternative energy continues to provide no more than a trivial contribution to meeting the world's need for power, especially in the advanced, temperate zone economies. For example, as of July 2011 solar power produced only 661,339 billion BTUs or 0.002 percent of total world production of 267,757,600 billion BTUs. Wind power produced 0.012 percent while geothermal accounted for just 0.0007 percent.

This implies that Malthusian resource panic lies ahead as countries scramble to reserve as much precious hydrocarbon fuels, especially petroleum, for themselves, as they can secure. As a rule of thumb, it would not be wrong to assume that, barring recession, the market supply for oil-importing countries will more or less recede from year to year.

The world consumes far more oil each year than is discovered, a trend that has persisted for decades. Therefore, a reasonable basis for forecasting the future prosperity of different economies is their relative capacity to sustain or even expand current energy use. For reasons I spell out next, Brazil has more capacity than most other economies to increase energy inputs per capita in a way that increases the return on energy invested.

While renewables and alternative energy seem to be a lost cause in many economies,
Renewable Energy World
magazine raves, “With almost half of its energy supply generated by renewable sources, Brazil increasingly looks like a positive example for the rest of the world.”
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Equally, the United States is ill-suited to effect a seamless transition to alternative sources of energy. For one thing, the United States lacks many of Brazil's natural advantages. Nowhere is that better epitomized than in the pathetic results of George W. Bush's cellulosic ethanol project. You may remember this grand declaration from his 2006 State of the Union address: “We'll fund additional research in cutting-edge methods of producing ethanol, not just from corn but from wood chips and stalks or switchgrass. Our goal is to make this new kind of ethanol practical and competitive within six years.”

Subsequently, Congress passed an energy bill that provided a tax credit of $1.01 per gallon for this new cutting-edge fuel. Congress and Presidents Bush and Obama also showered loans, grants, and subsidies to producers, as well as guaranteeing them a market by mandating the purchase of 250,000,000 gallons in 2011. Unfortunately however, actual production in 2011 was a mere 6.6 million gallons. Faced with a 97 percent shortfall in supply, oil companies were forced to purchase waiver credits for failing to comply with the purchase mandate. In 2010 and 2011 oil companies in the United States paid some $10 million for failing to buy a product that doesn't exist. A report on biofuels by the National Academy of Sciences issued in October 2010 concluded that “currently, no commercially viable bio refineries exist for converting cellulose biomass to fuel.”
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In the words of the
Wall Street Journal
,

Congress subsidized a product that didn't exist, mandated its purchase though it still didn't exist, is punishing oil companies for not buying a product that doesn't exist, and is now doubling down on the subsidies in the hope that someday it might exist. We'd call this the March of Folly, but that's unfair to fools.
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Meanwhile, Brazil produced 6.92 billion U.S. gallons of ethanol in 2010, production that directly substitutes for oil. Reuters reported, “‘Brazilian ethanol output, and biofuels as a whole, continue to constitute strong sources of non-OPEC supply growth that warrant increased analytical scrutiny,' the IEA said in its monthly oil market report. ‘For 2010 and 2011, we see annual Brazilian ethanol production growing on average by 50,000 barrels per day, to 475,000 bpd and 520,000 bpd, respectively.'”
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Furthermore, Brazil's unsubsidized sugarcane ethanol has an energy balance about seven times greater than U.S. ethanol produced from corn. The energy balance is the difference between the energy required to produce and deploy an energy source and the amount of energy gained from using it. It is generally accepted that Brazil's sugarcane ethanol produces eight times more energy than is required to make it. The energy balance from U.S. corn-based ethanol seems to be about one unit of current energy equals 1.25 energy units of corn ethanol. But some critics of corn ethanol production in the United States, such as Tad Patzek, a geological engineer from the University of California, Berkeley, contend that ethanol and biofuels in general (as pursued in the United States) are “energy negative,” meaning that they require more energy to produce than is contained in the final product.
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Given the perhaps negative or at best marginal energy balance earned from U.S. biofuels, Brazil could be a model for countries around the globe, especially in terms of its sugarcane ethanol program. Though critics say Brazilian ethanol is only sustainable because of its high quantity of arable land and advanced agricultural-industrial technology, it is still widely considered one of the most successful alternative fuels to date.

Meanwhile, Brazil also has a successful biodiesel program that principally employs palm oil along with castor bean, soy, cottonseed, and sunflower. Petrobras is operating five biodiesel plants with a total capacity to produce 721.4 million liters of biodiesel a year in Minas Gerais, Bahia, Caera, Parana, and Rio Grande do Sul states.

Much as the United States once enjoyed a comparative advantage in energy in the nineteenth and through the first three quarters of the twentieth century, Brazil now enjoys a comparative advantage in biofuels.

This advantage also extends to other renewable energies. As discussed in Chapter 3, Brazil is one of the world's largest generators of hydroelectric power. Some 82 percent of Brazil's electricity is produced through clean renewable sources, compared to 11 percent in the United States. Brazilian energy demand is growing 10 times faster than that of the United States, principally because it has the scope to grow.