Latin America's largest economy and oil producer Brazil has been hit hard by soaring inflation which along with rising political unrest is threatening its economic recovery. By October 2021 Brazil's inflation rate had surged to an eye-watering 10.74% more than double the 4.56% recorded for January 2021. This unexpected event forced Brazil's central bank, Banco Central Do Brasil, during December 2021 to hike the headline Selic interest rate by 1.5% to 9.25%, among the single largest rate increases over the last two decades, in a bid to tame spiraling inflation. The central bank has warned that unless inflation eases, rate hikes will continue, further threatening Brazil's post-pandemic economic recovery, which according to some analysts has already stalled.
It is the surge in oil prices, which saw the international benchmark Brent price breakthrough $85 per barrel by mid-October 2021, which is responsible for Brazil's soaring inflation rate. This is occurring despite Brazil being Latin America's largest and the world's seventh-largest oil producer, pumping an average of 3.6 million barrels of oil equivalent for October 2021. Even President Jair Bolsonaro's attempts to rein in fuel prices by dismissing the CEO of national oil company Petrobras in February 2021 has done little to contain their rapid rise. Brazil is among the countries worst affected by the COVID-19 pandemic with Latin America's largest economy ranked third by cases and second by deaths. This has sharply impacted Brazil's economy. IMF data shows that Latin America's largest economy shrank by 4% during 2020. While Brazil's gross domestic product is forecast to bounce back expanding by 5% during 2021 this could be derailed by the inflationary spike which will sharply curtail domestic spending and business investment. Between January and October, 2021 gasoline prices in Brazil had soared by a whopping 36% and diesel had risen by 22% placing considerable financial pressure on many households while causing costs for many goods and services to spike. According to Brazil's central bank, it is the unexpected significant rise in fuel prices that is responsible for surging inflation reaching nearly 11% by October 2021.
Not only is this weighing on the economic recovery, but it is triggering considerable political and social unrest. In early October 2021, Brazil was swept by anti-government protests, which while predominantly peaceful and not marred by the violence that occurred in Colombia, caused geopolitical risk and uncertainty to spike. By early November 2021, Brazilian truckers were protesting high fuel prices, although there were no reports of disruptions to ports, transport infrastructure, or fuel distribution hubs. Those events have, however, placed even greater political pressure on an increasingly isolated Bolsonaro who is facing general elections next year where the president, vice-president, and the National Congress. The popularity of Brazil's president has plunged to a low of 22%, with signs it dipped below 20%, placing him well behind his chief rival in next year's vote, leftist ex-president Luiz Inacio Lula da Silva. Further ratcheting up the pressure faced by his government engulfing Brasilia in considerable political uncertainty which is further weighing on Brazil's economic recovery.
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There are fears that as political unpredictability grows it will deter investment in Brazil's economically crucial oil industry causing its projected growth to slow. Brazil, which is the world's seventh-largest oil producer, is struggling to draw interest from foreign energy companies to invest in its vast pre-salt offshore oil basins. At Brazil's 17th bid round, held during 2021 and the first oil auction since before the pandemic, only five of the 92 offshore blocks on offer were acquired. Energy supermajor Shell snapped up five blocks acquiring 100% of S-M-1707, S-M-1715, S-M-1717, and S-M-1719 while purchasing a 70% interest in S-M-1709 with the remaining 30% acquired by Colombian national oil company Ecopetrol. Those blocks are in the prolific offshore Santos Basin, which holds Brazil's largest and most productive pre-salt oilfields.
It is imperative for Brazil to attract considerable investment to its booming offshore petroleum industry if Latin America's largest oil producer is to fulfill its goal of becoming a global top-5 oil producer by the end of the decade. Data from Brazil's oil regulator, National Agency of Petroleum, Natural Gas and Biofuels (ANP - Portuguese initials) data shows that for November 2021, Latin America's largest economy pumped 3.7 million barrels of oil equivalent per day which was 77% weighted to crude oil. That represented a 3% increase compared to a month earlier and was 4.5% higher year over year. Based on annual 2020 production figures, Brazil would need to lift its petroleum output to over 4.7 million barrels per day if it is to become a global top-5 oil-producing nation. That means Latin America's largest economy must expand production by over 1 million barrels per day when compared to its November 2021 output if it is to achieve its planned crude oil output. Any major disruption to Brazil's economic recovery and political stability, including imposing a stricter regulatory environment for foreign energy investors, will deter much-needed investment. If inflation continues to surge and Brazil's economic recovery is stalled for a lengthy period uncertainty will ratchet upwards at a crucial time for the country with elections looming in 2022.
By Matthew Smith for Oilprice
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Matthew Smith is Oilprice.com's Latin-America correspondent. Matthew is a veteran investor and investment management professional. He obtained a Master of Law degree and is currently located… More