Tags: Brazil's | Oil | Independence

Brazil's Oil Independence

Monday, 24 April 2006 12:00 AM

In its latest edition of the World Economic Outlook, the International Monetary Fund says that the U.S. dollar will have to depreciate "significantly" to level out global imbalances.

Partly as a result, the dollar sank to a seven-month low last week.

The IMF is calling for countries in Asia and oil-exporting countries to let their currencies appreciate against the dollar, saying that a "realignment in exchange rates" is necessary.

The U.S. posted a record trade deficit of $723.6 billion in 2005 – and it will likely increase this year. If the dollar were to weaken, it would help shrink the trade deficit. 

The IMF labeled these monetary imbalances as the biggest threat to an otherwise "unusually favorable" economic environment. "These are the best of times, but they are also the most dangerous of times," said the IMF's chief economist Raghuram Rajan. It forecast global growth to clock in at 4.9% for 2006 and 4.7% for 2007.

The IMF raised its growth forecasts for Japan, China, India and oil exporters. The international lender was mixed on the strength of eurozone countries and the U.S., raising estimates for this year and lowering them for 2007.

The IMF also said that the U.S. market is vulnerable to a housing slowdown, warning that "a flattening in house prices could have a bigger effect on consumption than some studies show," reports the Financial Times.

As President Bush chastises Americans for their oil addiction, Brazilian President Luiz Inacio Lula da Silva is declaring oil independence for his country.

The leftist leader, widely known as Lula, introduced a brand-new offshore oil rig that will generate 180,000 barrels a day, bringing the country's total oil production to more than what Brazilians consume.

Run by the state-controlled energy company Petrobras, the P-50 rig will create 1.9 million barrels of oil output a day – exceeding the 1.85 million barrels used by Brazilians daily.

Eventually, the country would like to become an oil exporter, as it explores for more deposits off its oil-rich coast in the Campos Basin. Petrobras forecasts that by 2010, its production will exceed Brazil's needs by 300,000 barrels a day, according to the AP.

In the 1970s, says the AP, Brazil imported 85% of its oil, pushing the country into debt and driving double-digit inflation for decades. As a result, the country turned to ethanol as an alternative for oil and greatly reduced its oil consumption.

Plus, Petrobras developed what is considered state-of-the-art technology for deep-water drilling, increasing Brazil's oil production over the years.

Lula, elected in 2002, has largely been credited with pulling Brazil out of its hyper-inflationary cycle and restoring Brazil's economy.

Across the U.S., the average price of a gallon of gas has risen 25 cents over the past two weeks. 

"Gasoline is riding crude oil's price surge," explains Trilby Lundberg, president and founder of the Lundberg Survey, which assessed prices at nearly 7,000 gas stations on April 7 and again on April 21. The auto association AAA issued its own survey of 60,000 gas stations, which found that prices were averaging $2.90 a gallon.

During the same period, the price of a barrel of crude oil rose $5 to $75 on the Nymex, though it has eased off that price today.

California drivers are suffering the worst.

From Beverly Hills came reports of $4 for a gallon of gas. Drivers in San Diego were coughing up an average of $3.12 per gallon of self-serve regular. Motorists in Boise, Idaho, paid the least – an average of $2.54 per gallon – according to the Lundberg Survey. Five states, and the District of Columbia, saw gas prices averaging out north of $3 a gallon.

Contrary to popular opinion that the Saudi oil cartel or maybe even the big U.S. oil companies are to blame, Lundberg attributed some of the price rise on the costs of blending ethanol into gasoline and delivering the final product.

Government mandates require that a certain amount of ethanol be blended into gasoline, and gasoline containing ethanol cannot be shipped via pipeline – a fact that drives up the cost of delivery.

Further upward pressure on prices comes from ethanol import barriers: The United States has imposed a 54-cent-per-gallon tariff on imported ethanol, Lundberg said.

"Lifting that tariff could help contain gasoline prices, but of course that would take time and a great deal of political movement," she said.

Upward pressure on oil prices is also coming from Nigeria, where 25% of production is offline – the result of rebel attacks on oil facilities, she said.

Relief could come from Kuwait, whose government has offered to release two million barrels of oil per day if the Organization of Petroleum Exporting Countries (OPEC) agrees, Lundberg said.

The Association of American Railroads anticipates that for 2006, the major freight lines will invest an unprecedented $8.2 billion in new track, according to The Chicago Tribune, buying equipment and improving infrastructure. That's at least 20% more than was spent in 2005, which was considered a solid year.

"It's a historic shift after many decades when railroads couldn't make enough money to cover their cost of borrowing it, which discouraged capital spending in one of the more capital-intensive businesses," says the Tribune.

The paper quotes one retired chief railroad executive, who says this is the first time in about 50 years that his company will actually earn back its cost of capital.

Just 20 years ago, many huge freight railroad lines covered North America – but today, massive consolidation has whittled that down to what are referred to as the "Big Six."

"The remaining players are the two Western U.S. railroads, Burlington Northern Santa Fe (BNI ) and Union Pacific (UNP ); two Eastern U.S. railroads, CSX Corp. (BBB/Stable/A-2) and Norfolk Southern (NSC ); and two Canadian railroads. Canadian National Railway (CNI ) and Canadian Pacific Railway (CP)," according to an article in BusinessWeek.

On the surface, the current cash infusion into the railroad industry might surprise many, since in terms of the dollar value of freight hauled, trains comprise less than 10% overall transportation spending in the United States. Trucks receive the bulk of spending (85%), while pipelines, air and water transport make up the rest.

But "based on tonnage shipped, railroads have a significantly higher percentage of the total," the article claims.

Now some experts believe that after almost a century of adapting to compete with other more modern means of transport (and losing great sums of money in the process), the railroad industry is experiencing a watershed.

"Though some believe the current railroad boom represents the peak of an economic cycle, others see a longer-term change. After 90 years, the railroads finally have run out of excess capacity. That in turn has restored their ability to raise rates, according to James Valentine, a research analyst for Wall Street giant Morgan Stanley," says the Tribune.

"These positive trends in pricing and better returns are likely to continue for years, maybe decades," Valentine told the paper.


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In its latest edition of the World Economic Outlook, the International Monetary Fund says that the U.S. dollar will have to depreciate "significantly" to level out global imbalances. Partly as a result, the dollar sank to a seven-month low last week. The IMF is calling...
Monday, 24 April 2006 12:00 AM
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