TIME energy

How the American Oil Industry Got Its Start

Oil Well
AP This is the well near Titusville, Penn., that pumped the petroleum industry into existence 100 years ago. The picture was taken four years after Col. Edwin L. Drake struck oil on Aug. 27, 1859.

Aug. 27, 1859: Edwin Drake strikes oil in Pennsylvania with the first commercial well in the U.S.

America’s first successful wildcatter had a lot in common with fiction’s most famous whaler. Edwin Drake was as obsessively single-minded in his hunt for oil as Ahab had been in his quest for the white whale: He was called Crazy Drake, per PBS, after pouring the modern equivalent of more than $40,000 in investors’ money — and his own endless labor — into a search that spanned more than a year without results.

But on this day, Aug. 27, in 1859, Drake’s monomania paid off. He struck oil after drilling 69 ft. into the ground in Titusville, Pa., launching the petroleum age and making Titusville ground zero for the Pennsylvania oil rush.

Unlike Ahab (spoiler alert), Drake wasn’t destroyed by his discovery — at least not instantly. But although he was the first to engineer a successful oil-drilling system, lining his well with pipe to keep it from caving in, he never patented the method, and the money he’d made when he struck oil soon dried up.

A century later, TIME referred to him as “a sickly, bearded failure of a man in a stovepipe hat” in a story that nonetheless acknowledged that “[t]hough Discoverer Drake wound up virtually penniless and forgotten, his find opened the scramble for oil across the land,” inspiring a legion of oil prospectors to chase what had become, by 1959, “the greatest single source of wealth in America.”

His discovery also helped bring the whaling chapter of American history to a close. At the time, of course, petroleum didn’t power cars; it was used primarily to make kerosene for lamps. And it proved far cheaper than the prevailing source of lamp fuel: whale oil.

At its peak, around the time Melville published Moby Dick in 1851, whaling was the fifth-largest industry in the U.S., netting the equivalent of roughly $10 million, according to The Atlantic. But by the time Drake drilled for oil, over-hunting in the waters around North America had decimated local whale populations, forcing whalers to venture farther and stay at sea longer to catch their prey — and making the hunt both more costly and more dangerous, some historians say.

The parallels between the declining availability of whale oil at that time and the modern-day perils of the petroleum industry have not gone unobserved. As the New York Times has noted, whale oil once seemed to be an “impregnable” industry that the world could never do without. But petroleum, and the kerosene it produced, proved a fiercer rival to whalers than boat-bashing sea creatures.

Read more about Edwin Drake, here in the TIME archives: The Greatest Gamblers

TIME energy

Oil Price Collapse Triggers Currency Crisis in Emerging Markets

oil-pumpjack
Getty Images

The more emerging market currencies lose value, the more concern there is about their health

Emerging market currencies are getting slammed by the collapse in commodity prices, a downturn that has accelerated in recent weeks.

The health of many middle-income and emerging market economies has been predicated on relatively strong commodity prices. A whole category of countries achieved strong growth by exporting their natural resources. For example, Brazil’s impressive economic expansion since the early 2000s, and the huge number of people that were able to jump into the middle class, was made possible by exporting oil, soy, iron ore, beef, and a variety of other resources. High prices for these goods led to more growth, a strengthening of the currency, and a real estate boom in cities like Rio de Janeiro.

The same story unfolded in many other commodity-driven economies, from Latin America, to Africa, to Central and Southeast Asia.

However, with commodity prices down dramatically from a year ago, growth in these countries has slowed, and their currencies are sharply weaker than they have been in the past.

In fact, the fall of Brent crude below $50 per barrel has sparked a sudden downturn in emerging market currencies across the globe.

But it isn’t just oil prices slamming currencies. The worries over the Chinese economy, including the plunge in its main stock market this summer, have raised concerns about the vigor of emerging market economies. Worse yet, China’s surprise devaluation has sent shock waves through currency markets around the world.

Other countries now feel pressure to let their currencies depreciate, and if they have adhered to a currency peg up until now, some are being pushed to float. Kazakhstan decided to scrap its currency peg last week, and the tenge promptly lost 23 percent of its value against the dollar. Vietnam also devalued the dong.

The devaluations tend to have a cascading effect, with other emerging markets coming under increasing pressure from their competitors.

Nigeria’s naira is under fire following Kazakhstan’s move, and Nigeria’s central bank vowed to fight off speculative attacks on its currency. “We haven’t seen any reason so far to institute a change in the foreign-exchange policies,” a spokesman for the Central Bank of Nigeria, told Bloomberg in an interview. “The preponderance of foreign currency in the country has led to speculative attacks on the naira. People who have done it in the hope we’ll devalue will be hurt.”

Russia’s ruble fared worse following the move by Kazakhstan to float its currency. It is now at its lowest level in six months, and could soon blow through the record low seen earlier this year when Russia suffered a brief currency crisis. Unfortunately for Moscow, the run on the currency comes on top of brewing fiscal problems, as the budget deficit has ballooned to its largest level since 2010, following the financial crisis.

However, Kazakhstan’s decision to float the tenge made sense given China’s devaluation and Russia’s own action to allow the ruble to lose value over the last year. Kazakhstan was seeking competitiveness for its economy. But one devaluation begets another.

The list of currency problems stretches long. South Africa’s rand is at its weakestin over a decade. Turkey’s lira has lost 19 percent so far in 2015. Mexico peso haslost about a quarter of its value since August 2014. The more emerging market currencies lose value, the more concern there is about their health.

A lot of uncertainty reigns for emerging market currencies. All eyes are on Washington for what comes next. The Federal Reserve is weighing an increase in interest rates for the first time in years, a milestone as the central bank seeks to (slightly) withdraw its heavy hand in the U.S. economy. However, an increase in interest rates would strengthen the dollar.

That would make the currency problems in emerging markets worse, both from the comparative devaluation against the dollar and from a potential further weakening in commodity prices. The global concerns could convince Janet Yellen to wait.

This article originally appeared on Oilprice.com

More from Oilprice.com:

TIME Environment

EPA Proposes New Rules to Cut Climate Change-Causing Methane Emissions

Gina McCarthy - EPA
Alex Wong—Getty Images Administrator of the U.S. Environmental Protection Agency Gina McCarthy at a hearing before the House Science, Space, and Technology Committee in Washington on Jul. 9, 2015.

The announcement is part of a continued White House effort to address climate change

The Environmental Protection Agency (EPA) on proposed Tuesday dramatic cuts to methane gas emissions from the country’s oil and gas industry, part of a broader White House push to address climate change. The regulations, the first ever of their kind, play a key role in the Obama administration’s goal of cutting overall methane emissions by 40 to 45% over the next decade from 2012 levels.

The proposed rule will directly lead to a 20 to 30% reduction in methane emissions from the energy industry, Janet McCabe, acting assistant administrator for EPA’s Office of Air and Radiation, said on a conference call for journalists. The EPA did not specify how the U.S. plans to make the further methane cuts needed to reach Obama’s 40 to 45% goal.

Methane, the key component of natural gas, is the second most prevalent greenhouse gas emitted by human activity, and pound for pound, has more than 25 times greater an effect on climate change than carbon dioxide over a 100-year period. (Over the long term, the differences between the two gases narrow, because CO2 remains in the atmosphere much longer than methane.) Leaks from the oil and natural gas industry make up nearly 30% of methane emissions in the United States, with the rest coming from agriculture and landfills, among other sources.

In recent years, the rapid increase in hydraulic fracturing, better known as fracking, has fed concern over methane emissions. Oil and gas producers emit methane gas as a byproduct in the fracking process, as well as through leaky pikes and other faults in the energy supply chain. A number of recent studies have suggested that the oil and gas industry releases more methane into the environment than previously recognized, four times as much by some accounts. Natural gas gathering and processing facilities leak about 100 billion cubic feet of natural gas annually, according to a study released Tuesday.

The EPA announcement calls for new standards at fracking wells, natural gas processing sites and other spots subject to leaks.

“Today, through our cost-effective proposed standards, we are underscoring our commitment to reducing the pollution fueling climate change and protecting public health while supporting responsible energy development, transparency and accountability,” said EPA Administrator Gina McCarthy in a statement.

Read More: Obama to Unveil ‘Most Important Step’ Ever to Combat Climate Change

The proposed rule drew immediate praise from environmental advocates, though many used the opportunity to express lingering concerns over continued U.S. reliance on fossil fuels. On Monday, a federal agency gave final approval for new oil drilling in the Arctic—another sign that the Obama Administration will continue to support the production of oil and natural gas in the U.S. even as it tries to regulate the industry. (Presidential candidate Hillary Clinton announced her opposition to Arctic drilling on Monday).

The proposed regulations would only address emissions at new oil and gas wells, which drew criticism from environmental groups as inadequate.

“These rules pave the way for the Administration to move swiftly to curb emissions from existing sources,” said Sierra Club executive director Michael Brune in a statement. Controlling methane, however, is not an end in itself and it will not make fracked oil and gas safe. Continued reliance on dirty fossil fuels is a dangerous course for our communities and our climate.”

Unlike the swift condemnation of Obama’s Clean Power Plan earlier this month, industry reaction to the proposed rule has been muted thus far. Still, Harry Weiss, head of the Environment and Natural Resources Group at Ballard Spahr, a major law firm, said the proposed rule would likely prompt complaints from at least some in the industry. “Any regulation has the potential to seem onerous, particularly when the regulated community has to dig into their pockets,” he said.

The White House has announced new initiatives to address climate change at a rapid clip in recent weeks. Most significantly, the EPA announced earlier this month a mandated 32% reduction in carbon emissions from power plants by 2030 from 2005 levels.

The White House hopes the push on climate change will provide momentum on the issue going into a December United Nations conference on this issue. Climate activists and government officials around the world hope the meeting will lead to the first binding agreement mandating policies to address climate change. Recent announcements from the Obama administration signal that the U.S. intends to play a key role in those discussions, unlike in past conferences on the issue.

“What this proposal shows… is just how serious this administration is about putting real concrete measures in place to reduce emissions of harmful CO2 and methane,” said McCabe.

MONEY Gas prices

Drivers Outraged as Gas Prices Soar While Oil Prices Plummet

paying for gas
Predrag Vuckovic—Getty Images/iStockphoto

Prices at some gas stations spiked 50¢ overnight.

Earlier this week, analysts proclaimed that $2 gas would be common once again around the U.S. Global oil prices are cratering, nearing $40 per barrel, and shrinking wholesale rates can only result in lower prices at the pump.

Or so one would think.

Despite plunging oil prices, drivers throughout the Midwest have been subjected to dramatic price spikes at gas stations this week. In Cincinnati, for instance, the price for a gallon of regular increased more than 40¢ overnight at some stations. Less than two weeks after analysts predicted average prices in Michigan would drop below $2 by Christmas, average prices have soared to $2.98 according to AAA. The average price per gallon in Illinois has inched up to just under $3 as well.

The rise in prices throughout the Midwest has caused the national average to increase too, hitting $2.65 on Friday. That’s after a 27-consecutive-day decrease in prices had left the average at $2.58 on Tuesday.

Indiana has been one of the hardest-hit states, with gas stations in greater Indianapolis charging 67¢ more than they were earlier in the week. Speaking of Indiana, a problem with a refinery in the state is what’s being blamed for broad price hikes throughout the region. Specifically, an outage in part of the British Petroleum refinery in Indiana—”the most important unit in the biggest plant in the Midwest,” per Bloomberg—is what’s causing prices to spike during prime summer driving season.

Drivers are understandably more than a little upset at the unexpected rise in gas station prices, and some aren’t accepting the refinery problem as a legitimate reason for the swift increase. In Michigan, Rep. Michael Webber even called on the state attorney general to launch an investigation into the matter, which he suggested smells of opportunistic price gouging. “This dramatic increase in price deserves a full investigation by a trusted Michigan official,” Webber said in a statement. “In Michigan’s improving economic climate, the necessity of this price spike must be questioned.”

Meanwhile, Reuters is reporting that the refinery outage being blamed for extraordinarily high prices in the Midwest “may take months to resolve.”

TIME russia

These 5 Facts Explain Russia’s Economic Decline

Russian President Vladimir Putin Delivers State Of The Nation Address To Parliament
Sasha Mordovets—Getty Images Russian President Vladimir Putin delivers his annual state of the nation address to the National Assembly in Grand Kremlin Palace on in Moscow on Dec. 4, 2014.

Corruption, cheap oil and unproductive workers all hold Russia back—though Russians don't seem to care

For the first time since 2009—low point of the global economic slowdown—Russia is in recession. Its economy will contract 3 percent this year, though Moscow’s $360 billion in cash reserves will cushion the immediate blow. Still, as President Vladimir Putin continues to try to assert Russian power on the international stage, it has become clear that he is now ruling a “submerging market.” Unless something changes, Russia is in for a slow and steady economic decline. These five sets of stats explain why.

(TIME, International Monetary Fund)

1. Lack of Diversification

It’s not simply the size of your economy, but its diversity and resilience that counts. For years, the Kremlin has supported and protected large state-owned companies at the expense of small and medium-sized enterprises (SMEs). But those smaller firms are the foundation of any strong and well-diversified economy. SMEs spur innovation and respond effectively to changing times, technologies, and consumer tastes. In the EU, SMEs contribute an average of 40 percent to their respective countries’ GDP; in Russia, SMEs contribute just 15 percent. Those are daunting figures for anyone looking to start a business in Russia.

Things aren’t getting better—between 2008 and 2012, Russia’s private sector lost 300,000 jobs while the state added 1.1 million workers to its payroll. Rather than diversifying, Moscow is doubling down on its state-centered approach to economic development.

(JYSkebank, The Economist)

2. At the Mercy of Oil Markets

The price of oil has now fallen below $45 a barrel—welcome to the new normal. OPEC continues to pump oil at historic rates as it tries to price out competitors, and Iran expects to bring over a million new barrels a day to world markets after the lifting of international sanctions. These are deeply troubling developments for Moscow, which relies on oil and gas sales for nearly 50 percent of its government revenues. In 1999, oil and gas accounted for less than half of Russia’s export proceeds; today they account for 68 percent. Moscow has grown so reliant on energy sales that for each dollar the price of oil drops, Russia loses about $2 billion in potential sales. For Russia to balance its budget, oil will need to surge back to $100 a barrel. That’s going to take a while.

(CNBC, CNN, Wall Street Journal , World Affairs, EIA, BBC, Financial Times)

3. At the Mercy of Sanctions

Moscow’s over-reliance on crude oil—which makes up 40 percent of Russia’s state budget—has also left the country particularly vulnerable to international sanctions. Given the age of many existing fields, Russia will increasingly depend on cutting-edge technology from Western firms to pump oil from difficult-to-reach shale and deep-water reserves. These sources could account for more than 15% of the world’s undiscovered oil reserves and 30% of the gas. Some argue that Russia can turn for help to China—but while China wants more Russian oil and gas, it doesn’t have the technology Russia needs to draw those resources from the ground. The IMF believes sanctions could eventually cost Russia 9 percent of its GDP.

(EIA, Forbes, Reuters)

4. Russia’s Other Problems

Russians aren’t nearly as productive as they could be. For each hour worked, the average Russian worker contributes $25.90 to Russia’s GDP. The average Greek worker adds $36.20 per hour of work. And Greece is not a country you want to trail in productivity. The average for U.S. workers? $67.40.

In addition, endemic corruption costs the Russian economy between $300 and $500 billion each year, or roughly the cost of three Greek bailout packages combined. This year, Freedom House gave the country a 6.75 on its corruption scale; 7 is “most corrupt.”

It’s no surprise then that well-educated Russians are leaving their country in droves. Between 2012 and 2013, more than 300,000 people left Russia in search of greener economic pastures, and experts believe that number has only risen since Moscow’s annexation of Crimea last year.

(Bloomberg, OECD, PBS, Telegraph, Wall Street Journal, Freedom House, Washington Post)

5. No Incentive to Change

Russia’s biggest problem may be denial. Typically, a stumbling economy brings about change in political leadership. Some countries, like Greece, take this to an extreme—Athens has seen five different governments in five years. But Russians have gone the other way—as their economy has slowed, Putin has grown more popular; he now holds an approval rating of 86 percent. More surprising is that while 73 percent of Russians are unhappy with their economy, 7 in 10 approve of the way Putin is handling it.

How is that possible? About 90 percent of all Russians get their news from Russian television channels directly controlled by the Kremlin. By framing sanctions and the invasion of Ukraine as “Russia vs. the West”, Putin has succeeded in stoking the country’s nationalism. Today, 63 percent of Russians have a very favorable view of their country, up from 29 percent in 2013 and 51 percent in 2014. It’s easier under those circumstances to blame bad economic circumstances on outsiders. Credit where credit’s due—Putin knows what his people want to hear. It’s just not clear if he knows how to fix his flailing economy.

(TIME, Pew Research Center, Washington Post, Pew Research Center)

TIME Donald Trump

Here’s What Donald Trump Would Do About ISIS

Real estate tycoon Donald Trump speaks during the prime time Republican presidential debate on August 6, 2015 at the Quicken Loans Arena in Cleveland, Ohio.
MANDEL NGAN—AFP/Getty Images Real estate tycoon Donald Trump speaks during the prime time Republican presidential debate on August 6, 2015 at the Quicken Loans Arena in Cleveland, Ohio.

He'd send in the military very quickly.

For anyone who thinks Donald Trump’s presidential candidacy is all bluster and no policies, check out this: The Donald has told the world exactly how he’d deal with ISIS.

The plan is sure to please the neoconservatives in the Republican party: use force.

“I would knock out the source of their wealth, the primary source of their wealth, which is oil,” he told MSNBC. “I would knock the hell out of them, but I’d put a ring around it and I’d take the oil for our country.”

Prior to the interview on Morning Joe, the hosts also ran a clip of Trump talking in 1987 about how he thought the US should invade Iran and take their oil, while leaving the rest of the country.

MONEY Oil

Oil Prices Hit 6-Month Low

Operations Inside A KazMunaiGas National Co. Oil Refinery
Bloomberg via Getty Images A worker walks along the top of a tank wagon as it is filled with petroleum ahead of shipping by rail at the Atyrau oil refinery, operated by KazMunaiGas National Co., in Atyrau, Kazakhstan, on Thursday, July 2, 2015. Kazakhstan is the former Soviet Union's second-largest oil producer.

"Economic weakness has set the tone," said Matt Smith, director of commodity research at ClipperData, a New York-based energy database.

Oil prices lurched 5% lower on Monday to their lowest since January, taking global benchmark Brent below $50 a barrel as weak factory activity in China deepened a commodity-wide rout.

Growing concerns over excess global oil supplies, heavy selling in pumped-up gasoline futures and technically driven momentum trading knocked prices to within a few dollars of the six-year lows touched at the start of this year.

U.S. crude had already fallen 21% in July, its worst month since 2008 amid mounting evidence of an expanding global glut and a stock market collapse in China, the world’s largest energy consumer.

On Monday, the rout deepened after data showed Chinese manufacturing growth unexpectedly stalled in July and U.S. consumer spending advanced at its slowest pace in four months in June as demand for automobiles softened.

Brent, the global benchmark for crude, settled down $2.69, or 5.2%, at $49.52 a barrel. Brent’s session bottom of $49.36 was within striking range of its 2015 low of $49.19.

U.S. crude settled down $1.95, or 4.1%, at $45.17, just about $3 above its 2015 bottom.

“Economic weakness has set the tone,” said Matt Smith, director of commodity research at ClipperData, a New York-based energy database.

“But the gasoline crack spread is also unraveling,” Smith said, referring to the difference between gasoline and U.S. crude prices, which sets the profit margin for refiners.

Gasoline’s front-month continuation contract settled down almost 9% from Friday’s close, its most in a day since October 2012, Reuters data showed. The gasoline crack, or spread with U.S. crude, narrowed to below $26, its lowest in more than a week.

“The chart is looking anything but constructive,” said Fawad Razaqzada, technical analyst in London for forex.com, who expects both benchmarks to set new lows for the year soon.

Oil hasn’t been falling alone. The 19-commodity Thomson Reuters/Core Commodity CRB Index, a global benchmark, hit its lowest since 2003, erasing almost all the gains of the decade-long commodities “super-cycle” fueled by China.

A Reuters survey last week showed oil output by the Organization of the Petroleum Exporting Countries (OPEC) reached the highest monthly level in recent history in July, reinforcing the idea that Saudi Arabia and other key OPEC members are focused on defending market share.

Hedge funds and other speculators have cut their bullish exposure to U.S. crude to a near 5-year low, trade data showed on Friday, as local drillers added rigs and pumped at full throttle despite the global oil glut.

Large investors in Brent also cut their holdings last week by the most in percentage terms since September 2014.

–Additional reporting by Amanda Cooper in London and Florence Tan in Singapore

TIME energy

Greenpeace Protestors Dangle Off Bridge to Stop Oil Ship From Leaving Portland

Arctic Offshore Drilling
Don Ryan—AP Activists unfurl colored banners while hanging from the St. Johns bridge in Portland on July 29, 2015, to protest the departure of Royal Dutch Shell PLC icebreaker Fennica.

13 people are dangling off the bridge and preventing the Shell exploration ship from leaving

Greenpeace activists swung off Portland, Ore.’s St. Johns Bridge on Wednesday in an attempt to stop a Shell Oil Arctic icebreaker from leaving the city.

Thirteen protestors rappelled off the city’s tallest bridge, with 13 others remaining on the bridge as lookouts, according to the Associated Press.

The activists are equipped with food and water for days and are capable of hoisting themselves up to allow other ships to pass, said Annie Leonard, executive director of Greenpeace USA.

The Royal Dutch Shell PLC icebreaker Fennica arrived in Portland last week for repairs after being damaged earlier this month in the Aleutian Islands when it hit an underwater obstruction, causing its hull to rip apart. Fennica is an important part of Shell’s exploration fleet of ships and spill-response team off the Alaskan northwest coast.

The activists are worried that the area Fennica is going to go to will block cleanup efforts should a spill occur. They had hoped the Obama administration would have rejected permit requests from Shell to drill in the Chukchi Sea. Instead, the administration gave Shell the go-ahead to begin limited exploration of oil drilling sites.

The bridge danglers hope the delay will kill the amount of time Shell will have to explore the Alaskan coast, as the summer season is winding down. They’re also hoping the government might reconsider its approval of the plan.

“These climbers hanging on the bridge really are at this point the last thing standing between Shell’s plan to drill in the Arctic and the Arctic,” Leonard said.

The U.S. Geological Survey estimates that combined Arctic offshore reserves in the Chukchi and Beaufort seas amount to about 26 billion barrels of oil.

TIME Earnings

BP Is Paying Big Time for the Gulf Oil Spill

A BP petrol station in London.
Nick Ansell—PA Wire/AP A BP petrol station in London.

The spill has now cost BP a total of $54.6 billion

BP Plc’s woes show no sign of ending as the company swung to $5.8 billion loss in the second quarter, thanks to falling oil prices and another $9.8 billion in charges to settle the remaining U.S. government claims for the Deepwater Horizon disaster.

The loss had been expected since the company announced the settlement in June, hoping to draw a line under the worst environmental disaster in U.S. history. The spill has now cost BP a total of $54.6 billion, and thousands of private claims against it are still outstanding. The company warned again on Tuesday that the impact of still-outstanding issues on its earnings could be “material”.

The company’s operating business looked little better, after a quarter in which crude prices fell to their lowest level in six years in a heavily oversupplied global market. Underlying cost replacement profits, the measure tracked by most analysts, fell to $2.43 billion from $5.90 billion a year earlier (before the sharp fall in crude prices) and from $2.53 billion in the first quarter of 2015. The bottom line was saved by BP’s downstream division, which includes refining, gasoline distribution and oil trading, and which generated over three-quarters of total underlying profit. By contrast, the contribution from its stake in Russian oil giant Rosneft halved to $510 million and upstream profits fell by nearly 90% to $494 million.

And there’s more gloom ahead: the company expects refining margins to shrink in the third quarter, and the spot crude price has tumbled in recent weeks as world commodity markets have taken fright at the scale of the economic slowdown in China. It expects its output of oil and gas to be broadly flat in the current quarter.

Like every other oil company, BP is scrambling to cut costs. It cut its capital expenditure by 22% in the first half of 2015 to $9.1 billion, and now expects full-year capex to be less than $20 billion, down from $22.9 billion in 2014. Some of those savings are being diverted to pay for other permanent cost reductions: the company now expects restructuring charges of $1.5 billion this year, up from the $1 billion it announced in December.

This article originally appeared on Fortune.com

TIME brazil

These 5 Facts Explain Brazil’s Crippling Scandals

Brazil Dilma Rousseff
Giuseppe Lami—AP Brazilian President Dilma Rousseff speaks during a joint press conference with Italian Premier Matteo Renzi, at Chigi's Premier Palace in Rome on July 10, 2015.

From a tanking economy to rampant corruption scandals, the 'B' in BRICS is in trouble

There are a series of scandals growing in Brazil, Latin America’s biggest country and one of the world’s most important emerging markets. The fallout could bring down a president who was reelected less than a year ago. Here are the 5 facts that tell the story:

1. Brazil’s Economy

Scandals are most damaging when an economy is slowing down. Brazil had a $2.35 trillion economy in 2014, the seventh-largest in the world. But 2015 has gotten off to a rocky start; foreign investment is down from $39.3 billion in the first five months of 2014 to $25.5 billion this year. Overall investment in the country has fallen for seven straight quarters.

Even worse, Brazil’s currency, the real, has lost 20 percent of its value since January. This by itself isn’t a bad thing—a less valued currency should make its assets cheaper and more attractive to foreign investors. Instead, Brazil’s economy is expected to shrink 1.5 percent this year.

Political scandals, and the uncertainty they create, are helping to scare off investors. The most visible involves Petrobras, the state-controlled oil company. As the scandal has unfolded, Petrobras stock has fallen 60% over the past year, and the company has had to write off $2 billion in bribery-related costs, while grappling with low oil prices.

(World Bank, Economist, Google Finance, CNN Money)

2. Petrobras Investigation

Why is a corruption scandal involving one company causing such shockwaves? Because it implicates the country’s highest political officials. The scandal began in March 2014, when Petrobras’s chief of refining was caught in a money-laundering investigation. In a bid for leniency, he confessed that companies awarded contracts from his division had diverted 3 percent of each contract’s value into political slush funds. Most of the money went to members of the governing Workers’ Party or their coalition allies. Initial estimates value the bribes at nearly $4 billion. Over two dozen executives from Brazil’s largest construction companies have already been arrested, and more than 50 politicians are now under investigation.

(Economist, WSJ)

3. Dilma Rousseff

This scandal could reach to the political mountaintop, because current Brazilian President Dilma Rousseff served as energy minister and chairwoman of Petrobras during the years of alleged corruption. There is still no evidence that Rousseff had knowledge of wrongdoing. But given the number of politicians from her Workers’ Party implicated in the scandal, a growing number of people say she is at least guilty of unpardonable negligence. Political opponents are calling for her impeachment, and the public’s suspicion is reflected in her poll numbers. In June 2012, Rousseff enjoyed a 59 percent favorability rating; in March 2014, around the time the scandal broke, her numbers had fallen to 36 percent. Her favorability rating has now plummeted to just 15 percent, according to Brazilian pollster CNT-MDA. Nearly 63 percent of Brazilians favor impeachment. On March 15, 1 million demonstrators gathered to protest Rousseff and the corruption of her government and the worst is probably yet to come.

(Financial Times, Bloomberg (a), Bloomberg (b), Reuters (a), Reuters (b))

4. Lula

Why? Because her mentor and political patron, former President Luiz Inacio Lula da Silva, is now being investigated for influence-peddling on behalf of Brazil’s construction giant Oderbrecht. Oderbrecht’s CEO was arrested last month on charges that he paid Petrobras nearly $155 million in bribes. When Lula left office, he held an approval rating of 90 percent, and Rousseff, his chosen successor, rode his coattails to the presidency. Rousseff should be worried; if Lula is indicted, he may blame Rousseff’s government, withdrawing his support for her. If so, Rousseff defenders within the ruling party may finally turn their backs on her.

Lula isn’t the only former president being investigated over Petrobras. Fernando Collor de Mello, Brazil’s president in the early 1990s, had over $1 million is cash and vehicles seized last week while investigators determine his role in Petrobras bribes.

(Wall Street Journal, Guardian, New York Times)

5. CARF and other scandals

Petrobras has dominated international headlines, but it’s not the only corruption scandal threatening the government. The latest involves the Administrative Council of Fiscal Resources (CARF), a division of the finance ministry. It’s alleged that some of its members, tasked with resolving tax disputes filed by corporations, ruled in favor of firms in exchange for 1 to 10 percent of the saved revenue. Over the last 10 years, the government is believed to have lost tax revenue of much as $5.8 billion. That’s nearly 50 percent more than the bribery figures associated with the Petrobras case. But because this case involves mid-level bureaucrats instead of top government officials, it receives far less attention from international media.

By the way, don’t forget Brazil hosts the 2016 Summer Olympics. Brazil has budgeted $8 billion for the Rio de Janeiro games—but Rio Mayor Eduardo Paes has bragged publicly that 57% of the financing will come from private sources instead of taxpayer pockets. Given Brazil’s current political climate, this news will raise eyebrows and new questions.

(Economist, Guardian)

 

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