Oil and Healthcare: Oil Prices Create Havoc in the Land of Soccer and Samba

Until recently, Brazil – like many other oil producing countries – benefited from high oil prices, experiencing years of economic growth and prosperity. However, in the two years since oil prices began falling in 2014, much has changed. 2016 should be a year of celebration in Brazil, which will be hosting the 31st Summer Olympics; instead, the country is facing an unprecedented economic and political crisis, which have shaken its foundations and may ultimately lead to the impeachment of the country’s president, Dilma Rousseff. Now, dark clouds hover over of the country, dark as the oil which supported the growth.

The Brazilian economy is intimately connected with the oil/natural gas industry, which is estimated to account for approximately 15 percent of its GDP and represents an important source of revenue to the country. In addition to the revenue from taxes and sales, federal, state, and municipal governments also receive royalties from the oil producing companies, which are used to balance their respective budgets. Those royalties vary between 5-10 percent of the value of the oil, discounting production costs, and while most of them go to the federal government and governments of producing states/municipalities, non-oil producing states are also entitled to a percentage. As a result, oil fuels government spending. As the price of oil collapsed, so did the royalties associated with its exploration; it is estimated that the total amount of royalties collected in 2015 decreased 25 percent to approximately R$14 billion (US$ 4.3 billion) in comparison with the previous year. This loss of revenue, associated with decreased tax revenues, and other factors, was felt in all sectors, but it hit the health sector especially hard, both the public and private sectors.

Public healthcare is Brazil is provided by the National Health System (SUS) and offers coverage to all the population. The public system is funded by federal, state and municipal governments, which allocate a minimum percentage of the net revenue (federal) and tax revenues (states and municipalities) for health. If the SUS was already considered severely underfunded before the crisis, falling oil revenue made that situation even more concerning. In response to lower oil-related revenue, Brazil’s healthcare budget was cut on several occasions in 2015, and the budget for 2016 has been considered as insufficient to meet the needs of the system.

Adding insult to the injury, the drop on the oil prices has prevented significant investments in new oil fields, especially the offshore fields in the rich “pre-salt” deposits, which are associated with higher exploration costs. In 2013, after realizing the economic impact the exploration of these fields could have to the country, law 12.858 was created, determining the mandatory use of 25 percent of the royalties received from oilfields in the “pre-salt” layer. However, the lack of development of these fields, driven by low profit margins, has precluded the health system from accessing these much needed funds.

The private sector, which serves approximately 25 percent of the population, did not escape to the negative impacts of the oil prices and the economic crisis; the rise of the unemployment rates led to decreases in affiliation to private healthcare, forcing hundreds of thousands to look for assistance at the SUS.

Although the whole country was impacted by the oil crisis, Rio de Janeiro State, one of the most affluent states in the country was also one of the most severely affected, making it a good case study for the impact of oil in the healthcare system. Overall, the state is responsible for more than 70 percent of the production of oil in the country, and oil industry is estimated to represent approximately 30 percent of the GDP. With the collapse of the oil prices, the total royalties collected fell nearly 30 percent to R$ 2.3 billion (US$ 700 million), significantly impacting the state’s budget. This has translated to reduced access to healthcare. By the end of 2015 there were abundant reports of closed emergency rooms, lack of medicines/medical products and physicians and nurses not receiving salaries, which culminated in emergency help by federal and municipal governments. Not only did the State’s royalty revenue decrease but Petrobras – the national oil company – also reduced its investments in the state, leading to the loss of jobs (in) directly associated with the industry. The revenues from the ICMS (Tax on the Circulation of Goods and Services), responsible for nearly 70 percent of the state’s tax revenue, also experienced a severe decrease, due to the loss of jobs and decreased production.

While it is worth noting that Rio de Janeiro is likely the most extreme case, due to the high association of its economy with the oil sector, the whole country has been affected by the oil crisis. The direct loss of revenue in certain areas of the country may have been minimal due to the little importance of the oil sector, but all of them were affected due to the impact on the revenues of all levels of government. After reaching minimum historical prices, oil price has recovered part of its value as of May 2016; even though no one knows where it will go in the future, it is a certainty that the health sector will suffer the consequences for a long period of time.