Updated 10:23 AM EDT, Thu, Jun 04, 2020

Brazil's Petrobras Fields Fail to Profit: Struggling Economy Brings Down Rest of South America

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Brazil once was a thriving economy, lending $10 billion to the IMF in 2009 when both the United States and Europe were struggling with their own crises, as noted by The Observer.

But things have changed significantly since then, and now, the country is on the verge of an economic collapse. To make things worse, one of the country's biggest investments in oil is losing money. Forbes noted that unless oil prices strike back to $40, about 80 percent of the country's Petrobras operations are losing money, with smaller fields likely to be returned to the National Petroleum Agency.

If Petrobras prefers to let their oil stand idle instead of offering it up to the market, they might lose over one billion reals.

Petrobras remains Brazil's biggest oil producer, and is in majority owned by the government. This means that when the Agency auctions off concession rights to other oil companies, Petrobras gets a cut of the deal automatically. Still, it will not make any money, as oil prices should be between $35 and $40 for them to make profits. At the moment, it sits at a little over $31.

This crisis in Brazil is intense: The Observer noted that it is now in its second year of recession and the economy is deemed to decline further. While this is alarming, the problem is not affecting only its own economy, but the rest of South America as well.

A professor of International Relations from the University of Brasilia said that "a weaker Brazil means that it cannot afford the old costly diplomatic agenda that often humiliated smaller neighbors."

But did the crisis begin in South America? Investopedia thinks that the problem began with China. The close relationship between the two countries had a domino effect on Brazil's economy, and the spiral is continuing on to the rest of the region. The devaluation of China's yuan slashed profit margins, making exports less competitive. The overall slash has already resulted in billions of loss in foreign sales for companies.

Considering that Brazil is one of the biggest economies in the world, a weaker Brazil will also prove to make a weaker South America, which is already starting to show.

For instance, in 2015 Brazilian imports dropped 28 percent, as noted by the Brazilian Foreign Trade Ministry. Being the largest destination for Argentinian, Paraguayan, and Uruguayan goods makes Brazil an important partner for its neighboring countries, including Colombia, Peru, and Venezuela, with the latter being the most vulnerable.

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