A couple of years ago I was thinking about the possible fates of various nations in a world in which depleting oil reserves begin to have a very strong impact on oil prices. I had visions of $100+ oil and eventually $5-10 gasoline, which would place a crushing burden on the U.S. economy.

Of course higher prices will motivate people to conserve (and will contribute to recession), and then you may find yourself in a situation in which the supply/demand balance once again tips toward excess supply (as we found ourselves in as oil approached $150/bbl). Prices fall. The economy starts to recover. What happens then? Prices rise, putting the brakes on recovery. This is what I postulated in The Long Recession. Today I saw that someone else had weighed in with the same general thesis:

Oil prices mean perpetual recession

“The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the U.S. went into recession. Right now, 4% of GDP is US$80 a barrel oil. So my current view is that if the oil price exceeds US$80, then expect the U.S. to fall back into recession,” wrote Steven Kopits, managing director for U.K.-based energy-consulting and -research firm Douglas-Westwood LLC in New York.

Long recession, perpetual recession - the idea is the same. If demand starts bumping back up against supply because economies are heating back up, it will be very tough to dig out of a recession for very long for countries that rely heavily on oil imports. Maybe we aren't there yet. Maybe we have another cycle to go. But I see this as a very plausible scenario.

One country that I have long felt is very well-equipped to thrive as oil prices go higher is Brazil. In fact, as I was preparing to buy Petrobras last year, I debated whether to instead buy into a closed end Brazil fund called iShares MSCI Brazil Index (EWZ). My reasoning was that as oil prices climb, the Brazilian economy stands to benefit in multiple ways.

There is of course the obvious in that Brazil has very large oil reserves relative to their population size, and their oil production is on the rise. It therefore stands to see cash flow into the country increase as they begin to export oil. I would expect to see consumer spending rise, benefiting many sectors in the country. For countries that wish to replace oil with alternative energy, Brazil is a key provider there as well. There is probably nobody better at efficiently producing ethanol from sugarcane. Their location in the tropics also means they have good solar insolation, improving the prospects for solar power (as well as for biomass, since they also get ample rain). All in all, they are abundantly blessed with fossil and renewable energy.

I saw another story today from MarketWatch that emphasized some of these very points and reminded me why I selected Brazil as a country with a bright outlook as oil production worldwide depletes:

Brazil's JBS shows a nation on the march

SAN FRANCISCO (MarketWatch) -- The Brazilians are coming and they are buying, securing a firm foothold in weakened corners of U.S. agriculture. JBS S.A., the world's biggest beef producer, just added Pilgrim's Pride to its empire, speeding the Texas-based chicken producer's exit from bankruptcy with an $800 million cash payment that will give JBS 64% of the company's new stock.

JBS is not the only Brazilian outfit feeling its protein these days. The country's economy is on a tear, much of it fueled by resurgent commodities. It posted surprisingly strong 1.9% GDP growth in the second quarter, making it the first Latin-American nation to emerge from the global recession.

Petrobras (PBR), Brazil's state-controlled oil company, is in the thick of it. Over the past few weeks, it announced several major new deepwater oilfield discoveries, prompting talk that it might swap some of its bulging reserves for up to $25 billion worth of new shares in the company.

The new found oil wealth augments Brazil's already booming sugar cane-based ethanol exports and vast hydroelectric supplies. Together, they have put the country in the enviable position of becoming a net energy exporter.

The article goes on to say that the Brazilian stock market is up 60% for the year.

So far, my decision to buy PBR over EWZ has proven to be the correct one. In the not quite 10 months since I bought it, the PBR is up 160%. The return from EWZ has been nothing to sneeze at though, up 117% over the exact same time period. This reiterates my belief that Brazil will be a safe haven in an oil-induced financial storm.