How would you feel if you found five billion barrels of oil in your backyard?
You would probably get filthy rich, right? Not if the government gets involved…
As a native of Brazil, I will never forget the day the government announced the discovery of the Tupi, a big oil field with more than five billion barrels.
Everyone in Brazil was euphoric.
Shortly after the discovery, I traveled to Brazil to meet with executives of Petrobras, the oil giant company that’s playing a key role in the offshore deep-water discoveries.
They couldn’t hide their excitement either.
They told me the discovery of Tupi and other oil fields would make Brazil one of the world’s top 10 oil producers. They told me the company was entering a golden period of prosperity. They said Petrobas’ investors were about to make a lot of money.
Since I met with them, shares of Petrobras have fallen 50%! Investors lost half of their money.
The government got involved.
Picking Winner and Losers
Getting oil in those deep-water fields is hard and expensive. I get that. But that’s not the main reason Petrobras is struggling.
The government is the problem.
As a state-controlled enterprise, the primary goal of Petrobras is not to make money for its shareholders. Instead, its primary goal is to make voters happy, making sure the government stays in power.
Last year, for example, the government kept a cap on the price of gasoline in order to fight inflation and keep voters happy at the pump. Because of the relatively lower prices of gasoline, the company had its first quarterly loss in more than 13 years.
Earlier this year, the government gave a break to Petrobras, allowing it to increase the price of gasoline by 6.5%. But in the process, it sacrificed another state-owned company: Eletrobras.
In order to offset the higher price of gasoline, the government cut the price of electricity by 11%, hurting the profits of Eletrobras. As a result, shares of the company are down 62% in the last three years.
With the government picking winners and losers, no wonder investors are afraid of investing in Brazil. And no wonder Brazilian stocks are among the worst performing markets recently.
Why Government Intervention Never Works
The Brazilian government control of oil and electricity prices are just a few examples of its many socialist policies.
Besides routinely intervening in Petrobras, it has also replaced the management of Vale, the giant mining group. For the government, the previous management team was favoring shareholders at the expense of the overall population.
The government has also pressured banks to cut lending rates to promote a credit boom. Never mind non-performing loans have already risen 15% in the past year.
The government also protects local manufacturers with steep tariffs, preventing competition from foreign firms. This results in higher prices and lower efficiency. That’s a big reason why everything is so expensive in Brazil… and why the country has no major tech or auto manufacturer.
At least the protection of local jobs makes voters happy. And that’s all it matters for the government.
With the current Brazilian president facing reelection next year, it’s very likely the government will continue to intervene in the economy to secure more votes.
There’s only one big problem…
Government Can Never Deliver Prosperity
If government intervention led to prosperity, countries like Argentina, Bolivia and Venezuela would be among the richest countries in the world. But they’re among the poorest.
And this is the lesson Obama and those who love big government should learn. Big government has never worked. And it never will.
In Latin America, countries such as Chile, Mexico and Peru, where there’s less government intervention, are doing much better than Brazil.
The lesson for the U.S. is this: the more Washington keeps meddling with things, the worse things will get. That’s because the government cannot ever invest more effectively than the private sector.
This means that the bigger the government gets, the weaker the economy will get.
Unfortunately, based on what I heard in the State of the Union Address, that’s exactly the path we’re following.
Editor, Pure Income
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