The unfolding of Brazil's current difficulties in the energy arena constitutes a classic example of distortions arising from misdirected regulation combined with the action of interest groups. When import-substitution industrialization began in the early 1950s, the country's main sources of energy were firewood, charcoal, and bagasse (the dry residue from the processing of sugarcane). Because modern industrial expansion could not be based on these, a decision had to be made regarding the sources of energy to be used. Not surprisingly, electricity and petroleum products received special attention.

Electric Power

In 1950 Brazil's capacity to generate electricity was only 1.9 million kilowatts, and most of the required petroleum products had to be imported. An adequate supply of electric energy became critical, both for production and for a rapidly growing urban population. Petroleum requirements expanded quickly because of the decision to make the automobile industry the mainstay of import-substitution industrialization and because of the heavy reliance on trucks for short- and long-distance transportation. Ambitious road-building programs were implemented, and the domestic automobile industry quickly expanded the stock of motor vehicles, reaching 1.05 million units in 1960, 3.1 million units in 1970, and 10.8 million units in 1980.

Low electricity prices stemmed from the substitution policy and from the attempt to control inflation by restraining the increase in public-sector prices in nominal terms. Thus, the capacity of the electricity sector to generate resources for investment was affected considerably. As a result of federally induced borrowing in the late 1970s and early 1980s, the sector was also heavily indebted. Intermittent adjustments in electricity prices allowed the sector to generate profits and thus some resources for investment. However, on occasion, the government returned to the practice of manipulating consumer prices to contain inflation.

Although the federal treasury initially assumed many of the cost distortions of the energy policy, by the end of the 1980s the virtual bankruptcy of the public sector precluded this approach. In the early 1990s, the government implemented a series of measures to reduce its role. It introduced deregulation, market reforms, and privatization, but these reforms did not change the essence of the energy policy. Interest groups prevented the adoption of measures that would drastically alter the liquid combustible policy, and the agency controlling electric energy continued to lack resources for investments. Thus, the energy price structure was altered only marginally.

Low electricity prices induced a considerable substitution of electricity for other sources of energy and the expansion of electricity-intensive production, such as aluminum. The heavy investments in hydroelectricity of the 1970s and 1980s matured, creating a considerable generating capacity (50,500 million megawatts or 93.3 percent of the total generating capacity of electricity in 1993). One of the world's leading producers of hydroelectric power, Brazil has a potential of 106,500 to 127,868 megawatts, or, according to the World Factbook 1996 , 55,130,000 kilowatts. The country's two largest operating hydroelectric power stations are the 12,600-megawatt Itaipu Dam, the world's largest dam, on the Rio Paraná in the South, and the Tucuruí Dam in Pará, in the North Region (see fig. 3).

In principle, an increase in the generating capacity for electricity should have been easy to achieve. Brazil has enormous hydroelectric potential, and investments in the sector were forthcoming, although with an initial delay. However, until 1995 nationalistic considerations excluded foreign capital from the electric energy sector, and regulatory obstacles prevented domestic private investment. The federal and state governments were therefore left with the task of expanding the generating capacity. As of the early 1990s, the government continued to control the sector's production end, as well as transmission and distribution, although privatization of the sector is under consideration.

Petroleum

The fast-growing requirements of petroleum and petroleum by-products were met initially by imports. However, foreign-exchange difficulties, coupled with strategic considerations, led to efforts to reduce the country's dependence on imports. In the early 1950s, the government granted a near monopoly of the exploration, production, refining, and transportation of oil to the Brazilian Petroleum Corporation (Petróleo Brasileiro S.A.--Petrobrás), the state-owned oil company, and made resources available for investments. Emphasis was placed on the expansion of a domestic refining capacity because world oil prices were low and no problems were envisaged with oil supply. Thus, an important refining sector developed gradually.

The oil crises of the 1970s placed Brazil in a vulnerable situation. In 1974 almost 80 percent of Brazil's total oil consumption was imported, and the increases in oil prices imposed a substantial burden on the country's balance of payments. Consequently, reducing dependence on imported energy, particularly petroleum, became the main objective of energy policy. This reduction was to be achieved by large investments in petroleum substitutes, notably electric energy and ethanol, and by a substantial expansion in the exploration and domestic production of petroleum. Although modest oil fields were not discovered until late in the 1970s, investments in the energy sector increased from around 10 percent of total investment in the early 1970s to a peak of 23.5 percent in 1982-83. As a proportion of GDP, investment in energy increased steadily, from 2.8 percent early in the 1970s, to a peak of 5.0 percent in 1982.

The government also implemented the energy price policy in reaction to the 1979 oil shock. The basic assumption was that the price of oil would remain at its high 1979 level. Thus, emphasis on promoting substitution was absolute. The problem, however, was that this emphasis did not change after oil prices began to decline. To encourage substitution, the government set energy prices. The price of gasoline was set at a high level, not only to reduce its use but also to finance Petrobrás's exploration effort and to subsidize other petroleum products. The prices of diesel fuel and propane (extensively used for cooking) were maintained artificially low, requiring subsidies. The low diesel price was intended to keep transportation costs from increasing sharply, and social arguments were used to justify the propane subsidy.

To induce the purchase of ethanol-propelled cars, the price of ethanol was maintained at 60 percent of that of gasoline. To finance this subsidy, a mixture of 20 percent of ethanol in the gasoline was established. The high gasoline prices exceeded the cost of ethanol, and the profits were used to cover the subsidy. Specially low prices for electric energy were established to encourage the replacement of fuel oil and other oil derivatives in production.

The combination of conservation and substitution, along with the expansion of domestic production, reduced the country's dependence on imported crude oil, from around 80 percent in the late 1970s to 45.6 percent in 1990. Domestic output of crude oil increased from an average 165,000 barrels a day in 1975 to some 800,100 barrels a day by 1996. By the end of 1995, Brazil's proven reserves had reached 4.8 billion barrels and potential reserves were at 8.8 billion barrels. About 64 percent of Brazil's domestic oil comes from the continental shelf in the Campos Basin, which accounts for 83 percent of proven reserves. The country's petroleum reserves may actually reach 20 billion barrels if as yet unproven discoveries in deep water off the Brazilian coast are included.

Despite these advances, however, the rigidity of the energy price policy brought about serious problems. The maintenance of the gasoline-ethanol price differential and other inducements led to a rapid increase in the purchase of ethanol-propelled automobiles and to a growing conversion of gasoline cars to ethanol. Moreover, the basic assumption that the price of oil would remain high was incorrect. Although world oil prices declined, the price policy remained in effect for ethanol producers, owners of ethanol-propelled cars, and the motor vehicle industry. Additionally, the real gasoline price was eroded gradually by the government's tendency to fight inflation by tampering with the prices of goods and services produced by the public sector. Also, the substitution of ethanol for gasoline caused a swift reduction in the sale of gasoline in the domestic market. Consequently, the profits Petrobrás obtained initially from gasoline dwindled quickly, and the company required assistance from the treasury for its exploration program and to cover various subsidies. The sharp increase in the use of diesel fuel for transportation, created by this fuel's subsidy, together with technical rigidities in refining, forced Petrobrás to produce much more gasoline than was required by the domestic market. This excess had to be sold abroad, often at below-cost prices. Because the demand for diesel fuel continued to grow and the demand for gasoline to shrink, Petrobrás was forced to invest heavily in changing the product profile of its refineries. In the early 1990s, the government reduced the gasoline-ethanol price differential (in 1993 the price of ethanol was 78.4 percent of that of gasoline). The price of gasoline was maintained sufficiently high to prevent massive subsidies to ethanol. The prices of diesel fuel and propane were increased.

Natural Gas

Brazil meets only 2 percent of its energy needs with natural gas, but the country's natural gas consumption is likely to increase greatly. In May 1992, the state oil companies of Brazil and Bolivia signed an agreement outlining the route for a 2,270-kilometer, US$2 billion pipeline system to deliver natural gas from Bolivian fields to Brazil's Southeast. The pipeline was scheduled to begin supplying 8 million cubic meters a day of Bolivian gas in 1997, building up to 16 million cubic meters a day by 2004.

Nuclear Power

Nuclear energy provides an interesting chapter in Brazil's energy policy. In the early 1970s, nuclear energy was considered to have great potential, but it failed to develop. In 1975 Brazil signed an agreement with the Federal Republic of Germany (West Germany) under which that country would supply eight nuclear power reactors and transfer technology for the complete nuclear fuel cycle. A small nuclear power plant--the Angra I, which has a 626-megawatt capacity--was built near Rio de Janeiro, and work was programmed to start on two larger facilities on the same site (the Angra II and III units, which were to have a combined capacity of 3.1 million kilowatts).

The Angra I plant, which has a reactor supplied by Westinghouse Electric Corporation, was completed and trial runs were made in 1982, but reactor defects delayed operations until 1983. Moreover, technical problems allowed the facility to function only intermittently. Regarding the Angra II and III plants, construction was started on the first. However, the fiscal crisis, a slower than anticipated growth in the demand for electricity in the 1980s, the adverse United States reaction to the Brazil-West Germany agreement, and a growing environmental militancy in Brazil led to slowdowns in construction.

In 1985 the agreement with West Germany was revised, and the construction of the other reactors was postponed indefinitely, in part for financial reasons. Moreover, growing fiscal difficulties led to an interruption of construction on Angra II and further postponement of Angra III. In 1988 it was estimated that the completion of the two plants would require US$2.8 billion, which was not available. In the early 1990s, there were no indications of when the two facilities would be completed. Despite the delays, the technology transfer clauses of the agreement have been maintained, and Brazil has continued to receive West German nuclear technology.

In 1990 Brazil's uranium reserves were estimated at 301,500 tons, or the equivalent of 2.1 billion tons of petroleum. A yellow-cake (see Glossary) factory and a plant to produce nuclear fuel elements have been completed, and additional processing facilities are under construction or planned. These will allow for the enrichment of uranium and the reprocessing of spent fuel. However, as was the case with the power reactors, lack of resources has slowed down developments in this area. In early 1997, the Brazilian nuclear energy program was being supplied by the only uranium mine operating in Brazil, in Poços de Caldas, Minas Gerais State. That mine is being deactivated and replaced by the Lagoa Real/Caetité Mine in the Caetité District in southwestern Bahia State (see Nuclear Programs, ch. 6).

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Source: U.S. Library of Congress