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Why does Brazil want to join Opec?
Brazil looks like it might fit well into the group: its 12 billion barrels of proved reserves is not too far short of Qatar's, an existing member of OPEC.
- Financial Times
- Published: 00:33 May 15, 2008
What is it about oil that makes Brazilian officials so talkative? Last month, the country's oil regulator provoked uproar when he claimed, very speculatively, that the recently discovered Carioca field might hold a massive 33 billion barrels of recoverable oil reserves. Now, Luiz Inacio Lula da Silva, Brazil's president, speaking to Der Spiegel, says he wants his country to join Opec.
In one respect, Brazil looks like it might fit well into the group: its 12 billion barrels of proved reserves is not too far short of Qatar's, an existing member. But even if Carioca proves prolific, Brazil would remain, by Opec standards, distinctly second-tier. Saudi Arabia, Iran and several Gulf states each have reserves of well over 100 billion barrels.
And Brazil uses a lot of oil, so the country remains years away from being a big net exporter. Lula da Silva would find it hard to make his voice heard at Opec meetings.
At the same time, Brazil would have to adhere to Opec output quotas. These might threaten the influx of foreign capital for development at a time when Brazil's oil industry is just beginning to realise its potential. For what? Brazil does not need to join Opec in order to profit from the group's inflationary effect on oil prices - look at Russia.
Bizarrely, Lula da Silva says he wants to work with Opec to bring down crude prices. Strengthening a group as a way to reduce prices is a novel concept. But, in any case, such remarks, especially when considered in the context of Brazil's leading biofuels industry, are unlikely to impress the organisation.
The call to join Opec comes after a string of successes in Brazil's oil sector and the country's achievement of an investment-grade sovereign credit rating. As with his oil regulator's claims, Lula da Silva's musings contain more than a hint of exuberance and grandstanding.
UK public finances
Those hunting for ugly economic facts will find a surfeit of them in Britain. Yesterday's consumer price inflation figures showed a rise of three per cent year-on-year in April: worse than expected and perhaps enough to prevent the Bank of England from cutting rates. The Royal Institution of Chartered Surveyors also published its most pessimistic house price survey since measurement began in 1978.
Could the real horror show be the public finances? Net borrowing is high relative to most big economies. It was 2.5 per cent of gross domestic product in 2007-08 and, according to Treasury forecasts, will be 2.9 per cent for this fiscal year and 2.5 per cent the next year. If the last downturn is anything to go by, UK governments can get their sums spectacularly wrong.
In 1990, a hallucinatory Conservative-run Treasury projected the books would balance in 1993-94. After a brutal recession the actual deficit turned out to be eight per cent of GDP.
As then, the government today forecasts that spending and receipts will remain constant relative to GDP this fiscal year.
In fact, it is likely that growth will be slower than the two per cent forecast, and that the public finances will be more cyclical. External "pessimistic scenario" forecasts, predicated on a slowdown of growth to below one per cent this year, point to net borrowing of about four per cent of GDP by 2009-10.
That would not be even close to crisis territory, but would have two implications. First, the government would break its (arbitrary) pledge to keep public sector net debt below 40 per cent of GDP, which might have a big political cost. Second, the UK, demonstrably spending beyond its means, would need to have a debate about how big government should be - just in time for a general election.
Even if Carioca proves prolific, Brazil would remain, by Opec standards, second-tier. Saudi Arabia, Iran and several Gulf states each have reserves of well over 100 billion barrels.
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