An Oil Slide Is the Last Thing Brazil Needs

Petrobras, Brazil's massive quasi-state oil company, was already a disaster for the country. If the price of oil continues to slide, however, it could turn into an emergency.

Petrobras stock fell 7% on Monday, continuing its 14% decline since last week, when OPEC decided not to decrease oil production. For the year, the stock is down 34%. The company's debt, however, is on the rise and now hovering around $95 billion - the company's market cap is about $59 billion.

That means it's absolutely imperative that Petrobras live up to its promises in terms of development and production. A continued decline in oil prices could put a serious damper on that, sucking cash out of a company already grappling with rising costs from capital expenditures.

The problem is that while Petrobras' capital expenditure costs have increased steadily - from 3% in 2012 to 6% in 2013 and 2014 - domestic production growth has not. Production growth actually went negative from 2011 to 2013, and it is crossing into positive territory only this year.

Meanwhile, the company is in the midst of a big pre-salt oil field development project that was supposed to increase production by 30% this year. So far, no dice there.

Now, one thing the government could do is raise domestic oil prices. For years Brazilians have been enjoying a discount on oil and gas thanks to Petrobras' largess. As one economist put it, the Rousseff regime "is doing fiscal policy through Petrobras."

For the government, this oil subsidy is an attempt to give ordinary Brazilians a break as the economy slows and the country battles with rising inflation.

But it seems the country can no longer afford it. And with a new economic team in place, the subsidy might just end. The team is helmed by Finance Minister Joaquin Levy, whose nickname is "Scissorhands" for his willingness to slash budgets.

Hiking oil prices for Brazilians while the rest of the world is getting a break, however, could aggravate Brazilians already angry at their government for corruption and mismanagement at Petrobras.

The company is in the midst of corruption scandal that has Brazilians watching on the edge of their seats. The SEC is looking into the matter as well.

President Dilma Rousseff, once a board chair of the company, said the scandal could "change Brazil forever" if heads roll. And they very well may - officials have raided offices and taken dozens of wealthy, powerful Brazilians into custody for various transgressions from taking kickbacks to siphoning money away from the company for political donations (to Rousseff's party, one should note).

If the company raises prices at this delicate time, Brazilians could take to the streets the way they did before the World Cup - by the thousands. This is the last thing Brazil needs.

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