Abstract: Capitalizing Petroleum in Brazil

Huancheng Du


Opening the Brazilian economy to global capital and trade markets in the 1990s occurred nearly simultaneously with the recognition of significant (and continually increasing) petroleum deposits in offshore territory. These fundamental changes have reinvigorated a question that resonates deeply in Brazilian history: how to accumulate sufficient capital to meet policy goals while also accommodating concerns about the national sovereignty of a crucial resource. This paper makes two contributions toward exploring this question. It offers the first historical extension of petroleum history to incorporate the new reserves that have changed the Brazilian position in global markets. Second, the paper introduces capital market data—rather than policy/political analysis—to consider the question of capitalization. The opening of the sector to private domestic and foreign capital, through both capital market operations, and the termination of the state-owned (Petrobras) monopoly, serve as turning points that allow us to test the efficacy of one of the most important ''openings'' among emerging markets with the advent of late twentieth century globalization. Mechanisms for accumulating private capital flows also motivated substantial changes in governance. While pursuing very large amounts of private capital, the state has kept a tight lid on the sector by maintaining a majority share of Petrobras and by the structure of regulation. We hypothesize that hybrid governance changes have reduced the perception of financial investors (as a proxy for all stakeholders) that open markets determine the actions of sector participants. Two approaches support our analysis. First, we evaluate the financial structure of Petrobras, distributed between equity and long-term debt, to assess financial patterns. Further, econometric analysis of our data on equity prices tests the effects of sovereign, financial, and commodity risks in the Brazilian petroleum sector. Financial and commodity risks (as measured by stock indices and petroleum prices, respectively) are crucially important. However, sovereign risk (as measured by real exchange and interest rate fluctuations) influences the sector equally strongly, suggesting strong limitations on expectations of political independence.