Is the pre-salt oil competitive? Economic and environmental long run impacts from the incentives to the pre-salt – a general equilibrium approach
Please cite the paper as:
Maria Juliana Iorio de Moraes, Angelo Costa Gurgel, (2014), Is the pre-salt oil competitive? Economic and environmental long run impacts from the incentives to the pre-salt – a general equilibrium approach, World Economics Association (WEA) Conferences, No. 1 2014, Is a more inclusive and sustainable development possible in Brazil?, 5th May to 12th August 2014
The Brazilian oil production reached 2.7 million of barrels per day in 2011 and the projections are to more than double that until 2020. Petrobras expects more than 40% of this production to come from the pre-salt layer. The estimated reserves of oil and natural gas from the pre-salt amount 50 to 70 billion barrels of oil equivalent, and, if proved, will position the country among the top ten nations in the world in terms of oil reserves. To turn these projections in production, the investments in capital will be massive.
However, the realization of its production will depend on the oil price in the incoming years, on substantial investments and on the country efforts to reduce its CO2 emissions. Considering such uncertainties and the importance of the oil sector to the country economy, this study aims to evaluate the competitiveness of the pre-salt oil and also to estimate the macroeconomic, sectoral and environmental impacts in the long run, until 2090, from the expected expansion in the oil extraction in the country.
To do so, we use the recursive dynamic general equilibrium model EPPA – Emissions Prediction and Policy Analysis, developed to investigate energy and climate scenarios and policies. We adapted the model, to include the pre-salt sector as a backstop technology, in order to represent the economic costs and benefits of its development as well as its capacity to compete with other energy technologies in an endogenous fashion.
The results show that the oil production from the pre-salt layer in Brazil would be competitive only after 2030 under free market assumptions. To achieve the production expected by the Brazilian government in the next years it is necessary to introduce economic incentives, considered as subsidies in the model, in order to drive investments and productive resources to the sector. This strategy, however, deviates scarce resources in the medium and long term, mostly capital, from other sectors of the economy toward the pre-salt sector, generating a lower GDP and consumer welfare when compared to a “business as usual” scenario without the presence of such subsidies. The incentive to the pre-salt oil production also produces an increase in the world cumulative greenhouse gas emissions at the end of the model horizon.