The Effect of Offshore Oil Windfalls on Living Standards in Brazilian Municipalities

Abstract

As a result of Brazil’s recent offshore oil boom, oil production has nearly doubled between 1997-2008. The newfound abundance of this natural resource has resulted in an oil-related fiscal windfall in municipalities situated along the Atlantic coast. Given the growth in offshore oil royalties and tax revenue associated with production, it is interesting to consider how governments have utilized additional municipal revenue to enhance public welfare. This analysis contrasts the spending patterns of municipalities that produce offshore oil with those municipalities that lack this resource. This paper further segments this analysis by examining how wealthy and poor municipalities have utilized additional oil-related revenue to enhance living standards. This study finds that while municipalities report spending larger amounts on public goods within the education and culture, health and sanitation, and housing and urban development sectors, these expenditures do not result in higher levels of living standards. Municipalities that lack offshore oil report the largest changes in living standards due to additional oil-related revenue, but the increase in welfare metrics is largely limited to the housing and urban development sector. Based on these results, I recommend restructuring the mechanism through which municipal royalties from offshore oil production are distributed.