Brazil Flexing Its Muscles

A couple of years ago I was thinking about the possible fates of various nations in a world in which depleting oil reserves begin to have a very strong impact on oil prices. I had visions of $100+ oil and eventually $5-10 gasoline, which would place a crushing burden on the U.S. economy.

Of course higher prices will motivate people to conserve (and will contribute to recession), and then you may find yourself in a situation in which the supply/demand balance once again tips toward excess supply (as we found ourselves in as oil approached $150/bbl). Prices fall. The economy starts to recover. What happens then? Prices rise, putting the brakes on recovery. This is what I postulated in The Long Recession. Today I saw that someone else had weighed in with the same general thesis:

Oil prices mean perpetual recession

“The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the U.S. went into recession. Right now, 4% of GDP is US$80 a barrel oil. So my current view is that if the oil price exceeds US$80, then expect the U.S. to fall back into recession,” wrote Steven Kopits, managing director for U.K.-based energy-consulting and -research firm Douglas-Westwood LLC in New York.

Long recession, perpetual recession – the idea is the same. If demand starts bumping back up against supply because economies are heating back up, it will be very tough to dig out of a recession for very long for countries that rely heavily on oil imports. Maybe we aren’t there yet. Maybe we have another cycle to go. But I see this as a very plausible scenario.

One country that I have long felt is very well-equipped to thrive as oil prices go higher is Brazil. In fact, as I was preparing to buy Petrobras last year, I debated whether to instead buy into a closed end Brazil fund called iShares MSCI Brazil Index (EWZ). My reasoning was that as oil prices climb, the Brazilian economy stands to benefit in multiple ways.

There is of course the obvious in that Brazil has very large oil reserves relative to their population size, and their oil production is on the rise. It therefore stands to see cash flow into the country increase as they begin to export oil. I would expect to see consumer spending rise, benefiting many sectors in the country. For countries that wish to replace oil with alternative energy, Brazil is a key provider there as well. There is probably nobody better at efficiently producing ethanol from sugarcane. Their location in the tropics also means they have good solar insolation, improving the prospects for solar power (as well as for biomass, since they also get ample rain). All in all, they are abundantly blessed with fossil and renewable energy.

I saw another story today from MarketWatch that emphasized some of these very points and reminded me why I selected Brazil as a country with a bright outlook as oil production worldwide depletes:

Brazil’s JBS shows a nation on the march

SAN FRANCISCO (MarketWatch) — The Brazilians are coming and they are buying, securing a firm foothold in weakened corners of U.S. agriculture. JBS S.A., the world’s biggest beef producer, just added Pilgrim’s Pride to its empire, speeding the Texas-based chicken producer’s exit from bankruptcy with an $800 million cash payment that will give JBS 64% of the company’s new stock.

JBS is not the only Brazilian outfit feeling its protein these days. The country’s economy is on a tear, much of it fueled by resurgent commodities. It posted surprisingly strong 1.9% GDP growth in the second quarter, making it the first Latin-American nation to emerge from the global recession.

Petrobras (PBR), Brazil’s state-controlled oil company, is in the thick of it. Over the past few weeks, it announced several major new deepwater oilfield discoveries, prompting talk that it might swap some of its bulging reserves for up to $25 billion worth of new shares in the company.

The new found oil wealth augments Brazil’s already booming sugar cane-based ethanol exports and vast hydroelectric supplies. Together, they have put the country in the enviable position of becoming a net energy exporter.

The article goes on to say that the Brazilian stock market is up 60% for the year.

So far, my decision to buy PBR over EWZ has proven to be the correct one. In the not quite 10 months since I bought it, the PBR is up 160%. The return from EWZ has been nothing to sneeze at though, up 117% over the exact same time period. This reiterates my belief that Brazil will be a safe haven in an oil-induced financial storm.

14 thoughts on “Brazil Flexing Its Muscles”

  1. I wonder how recession-proof an economy can really be, just through greater energy independence.

    "Brazil has an export-oriented economy. The main exports are transport equipment, iron ore, industrial raw materials, soybeans, footwear, coffee, autos, automotive parts, machinery. Brazil imports machinery, electrical and transport equipment, chemical products, automotive part and electronics. The primary trading partners of Brazil are United States, European Union and Argentina."

    If high oil prices started to seriously impact the US, EU, and Argentina, wouldn't Brazil be hurting too?

  2. If high oil prices started to seriously impact the US, EU, and Argentina, wouldn't Brazil be hurting too?

    They are about to become a net exporter of oil, and they can make ethanol for under $1 a gallon. Spiking energy prices may hurt some of their exports, but the energy dollars will start to roll in from oil and ethanol exports. So they have some protection that oil importing countries don't have.

    RR

  3. On the other hand, plummeting oil prices left even the major oil exporters wondering how they were going to balance the books at the start of this year (although that situation may have ameliorated somewhat as prices rebounded). I take your point about the cushion, but I'm guessing that extreme price volatility will leave nobody untouched.

    While I'm at it, you reminded me of an article from yesterday … Brazil is flexing its muscles in more ways than one.

  4. I bought some PBR too. Their success in Brazil is I think going to be a springboard to a brighter future. They operate 23% of the world's deepwater production – they're highly respected in the industry and this combined with their experience makes them an attractive partner for other high risk deepwater ventures. They have, for example, a position in Thunder Horse, the largest producing field in the Gulf of Mexico.

    They're also in some major high reserve projects overseas, like Sakhalin and Kashagan. I see them as offering growth potential well beyond their domestic business.

  5. There is a Thai stock, traded on the symbol UVAN, on the Thai stock exchange. Univanich.
    If you believe oil will go up and stay up, this is one interesting stock. They sell palm oil. They have plantations and crushing mills. Palm oil becomes biodiesel if crude prices go high enough, as in more than $90 or so.
    The nice part is that this stock pays a 14 percent dividend. And, it makes money even as a vegetable oil company. Palm oil is used as cooking oil and food additive, especially in Asia. China cannot get enough vegetable oil.
    The risk is that oil prices collapse, to $25 or so. That is a risk with every oil company.
    But this company would still function profitably even in the low oil price scenario, selling palm oil as cooking oil.
    The dividend could get cut.
    I looked into growing palm trees in Thailand, and researched the topic for while. The land I have is not right for it, but I learned about this company, and exchanged many e-mails with the CFO.
    Palm oil yields are rising handsomely, btw. It strikes me as a bullet-proof industry. China will buy raw materials like gangbusters for the next 100 years.
    There is always the risk that you take with any company, and that is that management goes blooey for some reason.
    Brazil? Looks promising. Still, Latin American countries have a long history of taking a golden opportunity on a silver platter, and smashing it on the ground. Venezuela, Mexico. Corruption, and a non-business culture collude to undermine the most determined enterprises. Maybe Brazil is different.
    Only a generation ago, living standards were higher in Argentina than in Europe. Italians used to migrate to Argentina. The country collapsed.
    I would bet first on Asia. The Asian cultures are incredibly productive.
    Commodities?
    Not sure. Commodities have a long history of collapsing. Cultures with strong work ethics do not.
    I think Thailand has a good future–actually I think the US and Europe also have good futures.
    Never before has there been so much venture capital available, and never before has so much R&D been done, all across the globe. It is an amazing period–there must be many multiples of venture capital deployed today compared to 25 years ago.
    In the energy sector, no good idea is lacking for VC, and even many mediocre ideas get funding (as RR points out frequently).
    The Internet speeds information instantly.
    Jeez, we may see PHEVs, CNG and methanol cars all in the next 10 years—who will buy crude oil?
    OPEC and thug states are constructing a very strange business model: Threaten your customers with unreliable supplies and high, erratic prices. Anybody think that will work?
    One more price spike, and I suspect OPEC is history, and maybe already.
    Play it as it lies, and caveat emptor.
    I think the next 20 years are a global GDP boom.

  6. The US is definitely blessed with fossil fuels. It's the #3 producer of oil. US coal reserves are the largest in the world,by far. We're #6 in natural gas reserves. But,our largest resource is definately shale oil. Our shale fields contain more oil than the Middle East. At some price point,those shale fields become economical to exploit. Being such a large resource,that price point would probably be the upper limit to oil prices,even in a peak oil world. I'm guessing we'd be out there with sledgehammers if oil hit $200 per barrel. Estonia has been producing its electricity with shale oil for decades.

  7. Why do you think they're about to become a net exporter? As Tony Erikson pointed out they brought on a whole huge raft of new fields in 2007 (640 kb/d total) with barely any effect on their output owing to decline; 2010 is the biggest year on the horizon forecast for new projects, a bit greater than 450 kb/d, after that things predictably tail off.

    Of course they will exploit their new finds as time goes by, but the increase in consumption has tracked supply all the while as well, and that will only increase with new found prosperity. They well may stay ahead of the decline/consumption curve, but I'm still dubious about this adding much to overall supply picture for the world.

    Looking at Petrobras as a shrewd investment is another matter entirely, of course. They may be a lightning rod geopolitically post peak too, of course.

  8. Well, it's a S. American Government, for one. But, that's a BIG one.

    Rufus~

    Not that big. At least a South American country is also an AMERICAN country. Being south of the equator doesn't make them any less American than the North Americans in the U.S., Canada, and Mexico.

  9. a person wishing for involvement with brazil's internal economic growth might look towards the ETF,BRF, also. this is a means to track small cap brazil. similar to index SML.SA. a mid cap of this dynamic economy can't be long in coming.

    fran

  10. I thought you might find this interesting.

    I have heard a bit about this. The story doesn't really put previous efforts into context though. There have been a joint project between Biofine and the U.S. government for a while working on this approach. They actually started running a 1 ton per day pilot plant in 1998. They had announced a full-scale plant in Italy, but not sure if it got built. So this isn't "new" as the article claims.

    RR

  11. The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the U.S. went into recession. Right now, 4% of GDP is US$80 a barrel oil. So my current view is that if the oil price exceeds US$80, then expect the U.S. to fall back into recession.
    Yes, but is Mr. Kopits confusing cause and effect?

    There are two ways for oil to reach 4% of GDP, assuming for the moment that oil going from $72/bbl to $80/bbl are correct numbers:
    – oil prices increase ~10%
    – GDP shrinks by ~10%

    The difference is that in the second case it is the drop in GDP (recession) that will cause oil to exceed 4% of GDP.

  12. Do resources make the country? Perhaps — but human & cultural resources, not physical resources.

    Look across the ocean from Brazil. There is another large, populous, resource-rich, equatorial country – Nigeria.

    Nigeria has the advantage of having lots of English speakers (better for international trade than Portugese). And Nigeria has a great educational system modeled on the old English system – before Political Correctness destroyed it. Anyone who has worked side-by-side with Nigerians will tell you how smart they are, and how fearsomely well-educated.

    Yet it is smooth Brazilian jet liners which flit in & out of European airports, leaving those Airbuses looking so yesterday. Not Nigerian.

    From the CIA Factbook – Brazil has ~200 Million people, 2.3 Million BOPD production, and a Per Capita GNP of $10,200. Nigeria has ~150 Million people, 2.3 Million BOPD production, and a Per Capita GNP of only $2,300.

    It is not physical resources which make a nation rich. It is not even human resources alone, although human resources are important. It is political culture.

    And political culture can change in front of our eyes. See that formerly great English educational system.

    Something to think about on the anniversary of the Soviet Union's invasion of Poland. Who would have guessed that, 70 years later, an Administration which claims the represent the US people would have chosen the same day to flip the old one-fingered salute to the brave people of Eastern Europe.

    We live on the cusp of great change. We will need more than hope to get get by.

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