Will Amazonian oil make Brazil richer or drive it into debt?

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Oil platform operating offshore. (Photo: Unsplash)

The confirmation of oil in the Morpho well, in the Foz do Amazonas Basin, puts Brazil once again before a discussion that goes far beyond the existence of new reserves. While the country seeks to expand its oil production and take advantage of a possible new source of revenue, the global economy is trying to reduce its dependence on fossil fuels and deal with the increasingly concrete effects of climate change.

In this context, one question needs to be at the center of the debate: will Amazonian oil make Brazil richer or drive it into debt? The answer depends not only on the volume of oil that may be extracted or the revenue that its sale may generate. It also depends on how the country will account for the economic, environmental and social costs associated with the extraction and, above all, the consumption of this oil.

Oil still represents an important source of wealth, revenue and energy security. At the same time, its use produces a climate cost that is not fully incorporated into the price paid by those who consume it. Knowing whether the economic benefit of extraction will be sufficient to justify the costs that it may transfer to society is the most important question. Production drives investment, generates jobs, increases exports and provides revenue for companies and governments through taxes and royalties. For a country that still needs to expand its public investment capacity and reduce inequalities, it is understandable that a new oil frontier is presented as a strategic opportunity.

The economic value of a barrel can be calculated at the time it is sold. It is possible to know how much a company received, how much the government collected and how much the activity contributed to GDP. The same does not apply to the costs associated with carbon emissions. They are distributed over time and space, appearing in the form of agricultural losses, infrastructure damage, pressure on healthcare systems, the need to adapt cities and impacts on vulnerable populations.

This asymmetry is relevant because the benefit and the cost are not necessarily borne by the same agents. The revenue from extraction has relatively identifiable beneficiaries: producing companies, shareholders, workers, governments and economic sectors associated with the oil industry. Climate impacts, on the other hand, may affect populations that have never had any involvement in the activity and that do not even live in the regions where the oil was produced.

The idea is to assign an economic value to the damage caused by the emission of an additional ton of CO2. Recent studies used in the economic debate on the subject have reached estimates above US$1,200 per ton, far above the values observed in various carbon pricing mechanisms. Let us take a purely hypothetical scenario to illustrate this difference. If 10 billion barrels of oil were used and each barrel were associated with approximately 450 kg of CO2, that would amount to around 4.5 billion tons of CO2. Applying a social cost of US$1,200 per ton would result in an estimate of US$5.4 trillion in climate damages. This exercise does not represent an estimate of the reserves of the Morpho well, nor does it mean that this volume will necessarily be produced or that Brazil will fully bear all these costs. Its purpose is to demonstrate how the perception of the profitability of an activity can change when environmental and climate costs are incorporated into the economic analysis.

The difficulty is that the market does not necessarily assign carbon a price close to the damage it causes. The World Bank points out that the weighted average price of emissions covered by direct pricing instruments is around US$21 per ton of CO2 equivalent. This means that there is a considerable difference between the price that certain markets assign to emissions and economic estimates of their social damages. This difference does not mean that carbon pricing mechanisms or carbon credits are useless. On the contrary, they can play an important role in reducing emissions and financing conservation, restoration and carbon removal projects. The point is that the price of a credit should not be confused with the total economic cost caused by the emission of one ton of CO2.

When part of the costs of an activity does not appear in its price, it is up to the government to decide how this difference will be addressed. In the case of oil, this also means discussing the compatibility of new investments with Brazil's climate objectives and with the trajectory of transformation of the global energy mix. Petrobras plans to invest US$2.5 billion and drill 15 new wells in the Equatorial Margin over the next five years. Therefore, the assessment should not consider each well in isolation. It is necessary to analyze the policy as a whole and its cumulative effects.

This does not mean that Brazil should simply abandon oil exploration. An energy transition does not instantly eliminate demand for fossil fuels, and oil will continue to play a relevant role in the global economy during the transition. Furthermore, unilaterally halting Brazilian production would not make international demand disappear. The most relevant point, therefore, is to decide what Brazil will do with the wealth it produces.

If additional revenues are used mainly to finance current expenditures and perpetuate dependence on a finite commodity, the new oil frontier may reinforce an economic model that is vulnerable to international fluctuations and incompatible with the need for energy diversification. If, on the other hand, part of these resources is directed toward infrastructure, science, technology, education, climate adaptation and the development of lower-emission energy sources, oil could function as a source of financing for a transformation that precisely reduces future dependence on fossil fuels.

This choice is important for Brazil because the country has a comparative advantage that goes far beyond oil. Its relatively clean electricity mix, its solar and wind generation potential, its biofuel production capacity and its natural resources could place it in a privileged position in the low-carbon economy. Oil exploration should not be considered separately from this strategy. There is also an issue of intergenerational justice. The resources extracted today belong to a society that immediately receives their economic benefits. Climate impacts, however, may persist for decades. Part of the population that will bear future effects will not have participated in the decision to explore and will not have received a proportional share of its benefits.

Therefore, transforming oil royalties and revenues into long-term wealth should be a priority. The debate over the Equatorial Margin needs to include mechanisms that ensure that a significant share of this wealth is converted into assets capable of benefiting society after oil production declines. The extraction of a finite resource should not result only in finite revenues. Brazil is facing a real economic opportunity, but also a strategic choice. The confirmation of oil in the Foz do Amazonas does not need to be interpreted as a definitive victory for fossil fuels over the climate agenda, just as the need to address climate change does not require ignoring the country's economic conditions.

The question that should guide Brazilian policy is what the destination of the wealth generated by it will be, which costs will be incorporated into the decision and who will be protected against those that remain outside traditional accounting. If oil is used to finance a more diversified, resilient and technologically prepared economy for the energy transition, its exploration could fulfill a strategic function during a period of change. If, however, the discovery is treated merely as another opportunity to expand production and postpone structural decisions, Brazil risks turning temporary wealth into prolonged dependence.