Brazil Is the New America: How Brazil Offers Upward Mobility in a Collapsing World (35 page)

4
“The Miracle of the Cerrado,”
The Economist
, August 26, 2010.

5
Duncan Geere, “Underground river discovered below Amazon,” Wired.co.uk, August 26, 2011,
www.wired.co.uk/news/archive/2011-08/26/underground-river-amazon
.

6
O. D. von Engeln, “Effects of Continental Glaciation on Agriculture,”
Bulletin of the American Geographical Society
46, no. 4 (1914): 242–243.

7
Von Engeln, “Effects of Continental Glaciation,” 243.

8
“The Miracle of the Cerrado.”

9
“Prevention of Post-Harvest Food Losses: Fruits, Vegetables and Root Crops. A Training Manual,” International Center for Tropical Agriculture, FAO Corporate Document Repository.

10
Christopher Wheatley, “Adding Value to Root and Tuber Crops,” International Center for Tropical Agriculture, FAO Corporate Document Repository.

11
Jeffrey D. Sachs, “Tropical Underdevelopment,” Center for International Development at Harvard University, Working Paper no. 57, December 2000.

12
Sachs, “Tropical Underdevelopment.”

13
“The Miracle of the Cerrado.”

14
“The Miracle of the Cerrado.”

15
M.G. Cardoso Costa, A. Xavier, and W. Campos Otoni, “Horticultural Biotechnology in Brazil,” ISHS Acta Horticulturae 725: Fifth International Symposium on in Vitro Culture and Horticultural Breeding.

16
“Brazilian Agriculture: The World's Farm,”
The Economist
, August 27, 2010.

17
“Fertilizer Use by Crop in Brazil,” Land and Plant Nutrition Management Service, Land and Water Development Division,
www.fao.org/docrep/007/y5376e/y5376e0b.htm
.

18
Sandra Postel,
Pillar of Sand: Can the Irrigation Miracle Last?
(New York: W.W. Norton & Company, 1999), 6.

19
Paul Collier, “The Politics of Hunger: How Illusion and Greed Fan the Food Crisis,”
Foreign Affairs
(November/December, 2008).

20
Ibid.

21
Collier, “The Politics of Hunger.”

22
Land and Plant Nutrition Management Service, Land and Water Development Division, “Fertilizer Consumption of Some Basic Food Crops and Export Crops in 2002,” Chap. 10 in
Fertilizer Use by Crop in Brazil
(Rome: Food and Agricultural Organization of the United Nations, 2004), 30–39,
ftp://ftp.fao.org/agl/agll/docs/fertusebrazil.pdf
.

23
Land and Plant Nutrition Management Service, Land and Water Development Division,
Fertilizer Use by Crop in Brazil
(Rome: Food and Agricultural Organization of the United Nations, 2004), 11.

24
Ibid.

25
Lee J. Alston, Gary D. Libecap, and Bernardo Mueller,
Titles, Conflict, and Land Use: The Development of Property Rights and Land Reform on the Brazilian Amazon Frontier
(Ann Arbor: University of Michigan Press, 1999), 34.

26
Thomas E. Skidmore,
Brazil: Five Centuries of Change
, 2nd ed. (New York: Oxford University Press, 2010), 59.

27
“The Miracle of the Cerrado.”

We know the country that harnesses the power of clean, renewable energy will lead the twenty-first century.

—U.S. president Barack Obama

We still do not know exactly how much oil is in the presalt layers. . . . We have strong evidence that God is Brazilian.

—Brazilian president Dilma Rousseff

The translation in this chapter's epigraph does not do Dilma's comments justice. A better rendition might read, “While we still do not know exactly how much oil is in the presalt layers, preliminary indications are that the oil is so plentiful that it proves Lula's assertion that ‘God is a Brazilian.'”

According to Representative Doc Hastings, chairman of the Natural Resources Committee of the U.S. House of Representatives, Brazil's offshore oil reserves “contain a combined 58 billion barrels of oil,”
1
a providential amount, considering that proven oil reserves in the United States were 21 billion barrels (3.3 × 10
9
m
3
) in 2006 according to the Energy Information Administration.

This represents a major turnabout in the fortunes of Brazil, if not in theology. In his intelligent and nuanced analysis from the turn of the millennium, “Tropical Underdevelopment,” Jeffrey D. Sachs argues that the income premium enjoyed in temperate zone economies during the nineteenth and twentieth centuries was at least partially attributable to their greater ability to mobilize energy resources. Sachs points out, “with regard to hydrocarbons (oil and gas), global production in 1995 . . . the per capita hydrocarbon production in the tropical countries was only 28 percent of the per capita hydrocarbon production in the non-tropical countries.”
2
In other words, the lagging economic development of tropical countries, of which Brazil is now the emerging counterexample, seemed to have closely paralleled their deficit in the production of BTUs.

Only a decade into the twenty-first century, however, there is growing evidence that Brazil is no longer an energy-poor, tropical country, but rather a new energy superpower whose future growth will be much less constrained by high oil prices than will the leading temperate zone economies.

Whereas politicians in the United States have been jabbering about the importance of energy independence since the 1970s, actual progress in that direction has been negligible, with oil imports rising from about 30 percent of consumption to as much as about 70 percent. Partly, the paltry U.S. progress toward energy independence reflects a conflict between energy and monetary policy. Given that oil is priced in dollars, a currency the United States can manufacture at little or no cost, the massive purchases of imported oil have helped maintain the bid for dollars, thus enabling Americans to live at a higher standard than they earn on the back of the world's reserve currency.

Brazil, on the other hand, has no reserve currency conflicts and has made dramatic progress in achieving energy independence. In 1974, Brazil imported almost 80 percent of its oil. Today, Brazil's net percentage of oil imports is less than zero. Brazil became an oil exporter in 2009.

Earlier in this book, I offered reasons to suppose that you are now living through the endgame of the rapid growth phase of economic history based upon cheap oil. This is a problem with both a demand and a supply dimension. Demand for oil grew sharply while supply growth stagnated. The emergence of the BRIC economies, along with other emerging market fellow-travelers dramatically increased oil demand.

Real world GDP rose by 5 percent annually in 2006 and 2007. This led to surging oil consumption. China alone increased oil consumption by 840,000 barrels a day between 2005 and 2007. Over a longer term, China increased oil consumption at a 6.3 percent compound annual rate in the decade after 1998.
3
If China's growth in oil demand continues over the next two decades it would imply oil consumption in that country of double the current U.S. levels by 2033.
4

As oil production has plateaued, the only way to accommodate a sharp increase in the consumption of some countries is by a reduction in the consumption of others. That implies sharply higher prices. In the words of economic historian James D. Hamilton, “with no more oil being produced, that meant other countries had to decrease their consumption despite strongly growing incomes. The short run price elasticity of oil demand has never been very high . . . meaning that a very large price increase was necessary to contain demand.”
5

The advent of peak oil implies still more abrupt price rises in the decades to come. The incumbent Organisation for Economic Co-operation and Development (OECD) economies, which led the world for years based upon growth fueled by cheap oil, face crises as the world experiences a major energy transition. Here is the crux of the issue from the World Economic Outlook (WEO) 2010 Executive Summary, “All of the net growth [in oil demand] comes from non-OECD countries, almost half from China alone . . . demand in the OECD falls by over 6 mb/d [million barrels per day].”
6

As unlikely as it may seem on first glance, this take from the WEO is implicitly optimistic. Why? Because the WEO's projection of oil production in 2035 puts oil output at 99 million barrels per day. While that is considerably lower than WEO projections from 2007, it represents a 12 percent increase in output from production levels in 2011. In other words, the WEO report suggests that oil output will rise rather than fall. But if oil output peaked in 2005, as it appears, output will not grow from here. Indeed, it is already apparent that oil discovery peaked way back in 1965, although some analysts argue that step-out discoveries associated with existing production should be counted as new finds.

However you slice it, it is beyond question that the easy production from existing oil fields does come to an end. This was evident in the history of oil production in Pennsylvania associated with Drake's original oil well in Titusville. His success there attracted other operators to develop large wells in other parts of the Appalachian field in Pennsylvania. By 1890, oil production from Pennsylvania and nearby New York was five times what it had been in 1870.
7
Yet, after oil prices fell to $0.56 a barrel during the recession of 1890–1891, annual oil production from the Appalachian field peaked, falling by 14 million barrels by 1894. Production there never recovered. As economic historian James Hamilton put it, “indeed even with the more technologically advanced secondary recovery techniques adopted in much later decades, [it] never again reached the levels seen in 1891.”
8

It is pertinent that production records from Texas and the North Sea show quite similar patterns of falling output after peaks—in 1972 in Texas, and 1999 in the North Sea. Texas production fell at a rate of 3.5 percent a year from 1972 to 1982 resulting in 1982 production being 31 percent below the 1972 level. North Sea production fell at a rate of 4.5 percent per year from 1999 through 2009. Production in 2009 was 38 percent below the level in 1999.
9

It is likely that other major conventional oil fields initially tapped 40 or more years ago will follow similar trajectories. With each year that passes, production potential from those older fields declines. Production from many smaller new fields is required to offset the annual depletion of the giant conventional oil discoveries that have been exploited for decades.

In spite of oil prices at $100 per barrel, and much improved technology, the huge finds of earlier decades are proving difficult to duplicate. So it is likely that you face a zero sum game in which the uptick in net demand for oil from non-OECD countries is met not by new net production but by displacement of demand from within the OECD. Here “displacement of demand” should be understood as “demand destruction” where rising prices make previous uses of energy financially infeasible in crumbling OECD economies. U.S. oil consumption, which surged above 21 million barrels per day in 2006, has plunged to 18.8 million barrels per day

In short, we've reached the zero sum stage of peak oil. This is bad news for the established users who are demanding oil for legacy systems designed when oil was cheap. They will probably be unable to grow if they cannot afford to out bid the emerging users who can pay higher prices at the margin for high-value applications of oil. As a general matter, it is obvious that the emerging economies will be better able to afford the higher prices and therefore will bid away the oil that the OECD economies need in order to grow.

Analyst Jeffrey J. Brown, one of the originators of the Export Land Model, argues that the prospects for oil-importing economies are even more grim than the statistics suggest at first glance.

He argues that the net export decline rate tends to exceed the production decline rate and that the net export decline rate tends to accelerate with time.
10
From a close analysis of the relationship between growing domestic consumption, production depletion, and export records in 16 oil exporting countries, Brown and his colleagues suggest that an ominous future awaits oil-importing countries (meaning most of the OECD economies, including the United States):

If we extrapolate the 2005 to 2009 rate of increase in consumption by the exporting countries out to 2015 and if we extrapolate Chindia's (China plus India) 2005 to 2009 rate of increase in net imports up to 2015, and if we assume a very slight production decline among the exporting countries (0.5 percent/year from 2005 to 2015), then for every three barrels of oil that non-Chindia countries (net) imported in 2005, they would have to make do with two barrels in 2015.
11

This scenario has grim implications for economic growth in the United States and the other leading OECD economies. The underpinning of this concern is strong enough that the U.S. military issued its own warning of an impending oil production shortfall in 2010. “‘By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the short fall in output could reach nearly 10,000,000 barrels per day,' says the report, which has a foreword by a senior commander, General James N. Mattis.”
12