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This Week In Energy: Petrobras Scandal Could Undermine Brazil’s Economy

Petrobras has tried hard to put its massive scandal behind it. After a corruption scheme involving kickbacks was uncovered last year, the Brazilian oil giant has buckled under the weight of the political blowback. The financial tally relating to the scandal seemed to rise by the day. In recent weeks however, the company hoped to put the worst of it in the past, offering up more concrete figures on its losses ($17 billion) to assuage the concerns of its creditors and shareholders. The financial markets have started to come to terms with the scandal, and Petrobras appears to be on the mend.

Not so for Brazilian President Dilma Rousseff, whose troubles are only growing. While at first dodging the worst of the scandal, Rousseff is now squarely in the crosshairs of her political opponents. After winning reelection last fall, she has managed to avoid being personally implicated in the scandal, but unrest with her rule has reached a peak. It is no help that oil prices have crashed and the Brazilian economy is stagnating. Meanwhile, the Brazilian public is highly unhappy with the trajectory of their country. Now lawmakers are considering whether or not to pursue impeachment charges for Rousseff. With approval ratings down to nearly 13 percent, and support for impeachment at 63 percent, there seems to be little danger in going after her. Related: Why Oil’s Rally Is Over

That could plunge the country into a political crisis. After years of stable, steady growth and a rising middle class, Brazil appeared to shed its image as a political and economic basket case. But inflation is high and the currency has already lost a lot of its value. At issue is a broader bust in commodities. We have closely followed the collapse in oil prices, but commodities across the board have seen their prices plummet. For Brazil, a country heavily dependent on commodity exports, particularly to China, that presents a mortal threat. Rousseff is trying to address the situation by pairing back some state-led interventions in the economy, but it is far from clear if she will be able to recover. For now, Brazil’s economy will listlessly inch forward, and Petrobras will try to regain its footing in the oil sector, but a brewing political and economic crisis beckons.

In the United States, the state of Oklahoma is set to follow Texas in stripping its towns and cities of the ability to pass bans on hydraulic fracturing. Strongly backed by oil and gas drillers, the move comes just as the state is dealing with a surge in the frequency of earthquakes. Oklahoma has become the earthquake capital of the nation, with seismic activity widely believed to be linked to the practice of injecting wastewater down into disposal wells. The ban on fracking bans will allow the state to continue to drill unimpeded by local opposition, and marks a major win for the industry. Related: Clock Running Out For Struggling Oil Companies

Making national headlines, a crude oil pipeline in Santa Barbara, California ruptured this week, spilling perhaps over 100,000 gallons of oil into the Pacific Ocean. An investigation is underway, but public beaches were closed as an oil slick spread several miles up and down the coastline. The spill was not far from the 1969 oil spill from an offshore platform, an iconic and landmark event that led to an array of environmental laws – the Clean Water Act, the National Environmental Policy Act, the Endangered Species Act – and even the creation of the Environmental Protection Agency. The chance of a similar push for new environmental restrictions is remote, but the oil spill has conjured up bad memories for Californians. 

Another safety incident from an oil company almost caused a “significant” disaster. Statoil (NYSE: STO) reported that in February there was a leak on board its Gudrun platform in the North Sea. A company investigation found that although the facility was shut down after the natural gas leak was found, the gas cloud that formed as a result of the leak could have ignited, causing an explosion that could have killed some of its workers. Thankfully, the oil giant avoided such an outcome, but the investigation is a chilling reminder of the dangers of oil and gas operations.

Speaking of the North Sea, oil and gas workers in the UK are moving towards a vote on whether or not to strike after talks with industry representatives over working conditions faltered. “We remain available for talks should the employers want to pull back from going ahead with the unilateral changes to working practices that (have) provoked this dispute,” a trade union representative said in a statement. The industry says that a strike will merely serve to make the North Sea even less attractive to future investment. The North Sea has seen its productivity decline in recent years, with costs for new oil production reaching some of the highest levels in the world. Waves of layoffs have hit the sector over the last year amid declining oil prices. Related: Natural Gas Prices Here Are Set To Rise 72%... Overnight

In oil price news, the US saw its inventories continue to decline this week, posting a fall of 2.6 million barrels. Weekly production figures in the US – a metric that has been criticized as not entirely accurate – also shows that output is creeping downwards. The data suggests US production is falling in order to balance out the glut, albeit very slowly. On the other hand, a more bullish signal comes from news that Saudi Arabia has actually turned down appeals from China to send more oil. In a sign that oil markets could in fact be a bit tighter than many think, Saudi Arabia rejected Chinese requests for extra cargoes in May and June, forcing China to go elsewhere. China had to find willing sellers in Russia and West Africa. What exactly is going on? Saudi Arabia is producing at its highest level in over three decades, but still finds it hard to send more oil to China? Perhaps they are finding demand to be more robust than what is being reported in the media.

In Iraq and Syria, the fight against ISIS continues to waver. Last weekend ISIS gained control of Ramadi, the most important city in al-Anbar province. A few days later, despite the Obama administration largely dismissing the event as a minor setback, ISIS seized Palmyra, an ancient city with treasured Roman ruins. The second blow to the campaign against ISIS in less than a week has raised more serious concerns. The Obama administration responded by pledging to send more weapons to Iraq, but the fight will drag on indefinitely. Still, with all of that said, Iraq is producing and exporting oil at near record levels.

By Evan Kelly of Oilprice.com


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