On the Cidade de Angra dos Reis oil platform, surrounded by the deep blue South Atlantic, a Petrobras engineer turns on a tap and watches black liquid flow into a beaker.

It looks and smells like ordinary crude oil. But for Brazil, this represents something much more spectacular. Pumped by the national oil company from “pre-salt” deposits – so-called because they lie beneath 2,000m of salt – 300km off the coast of Rio de Janeiro, it is some of the first commercial oil to flow from the country’s giant new deepwater discoveries.

Crude OilAlready estimated to contain 50bn barrels, and with much of the area still to be fully explored, the fields contain the world’s largest known offshore oil deposits. In one step, Brazil could jump up the world rankings of national oil reserves and production, from 15th to fifth. So great are the discoveries, and the investment required to exploit them, that they have the potential to transform the country – for good or for ill.

“This could be the largest private sector investment programme in the history of mankind – more than actually putting a man on the moon,” says Pedro Cordeiro of the Bain & Company consultancy in São Paulo. He estimates the total investment could be roughly equivalent to the annual gross domestic product of Australia. “Not counting new concessions, you will have $1,000bn of investment over the next 10 years. It’s huge.”

Deepwater oil production is hazardous, as the leak last year at BP’s Macondo well in the Mexican Gulf showed. But if all goes to plan, the discoveries will provide Brazil with a full tank of petrol at a time when its exports of iron ore, soyabeans and other commodities are already driving a boom. Latin America’s biggest economy grew 7.5 per cent last year and is expected to grow by nearly 5 per cent in 2011. Longer term, expected increases in the oil price driven by the nuclear crisis in Japan and political unrest in the Middle East will only help to make drilling deepwater oil more profitable.

Having seen out booms and busts before, Brazilians are hoping that this time “the country of the future” will at last realise its full economic potential. The hope is that the discoveries will provide a nation already rich in renewable energy with an embarrassment of resources with which to pursue the goal of becoming a US of the south.

The country’s scientists and industrialists see in the deposits the seeds of an oil-driven technological renaissance, which would speed Brazil’s race towards developed nation status. Economists, however, see a threat as well as a promise.

The danger for Brazil, if it fails to manage this windfall wisely, is of falling victim to “Dutch disease”. The economic malaise is named after the Netherlands in the 1970s, where the manufacturing sector withered after its currency strengthened on the back of a large gas field discovery combined with rising energy prices.

Even worse, Brazil could suffer a more severe form of the disease, the “oil curse”, whereby nations rich in natural resources – Nigeria and Venezuela, for example – grow addicted to the money that flows from them. This leads to poor governance and corruption.

Some argue that, oil finds aside, Brazil is already in the early stages of Dutch disease. Exporters and domestic manufacturers are struggling to compete globally as Chinese demand for the country’s commodities drives up the value of the real. The currency has strengthened about 40 per cent against the dollar in two years. The problem has become so acute that Brazil has condemned what it calls a worldwide “currency war”, alleging its trading partners are manipulating their exchange rates to keep them artificially low.

“[Brazil’s] Dutch disease comes from timber and meat, and all kinds of natural resources, not just oil,” says Professor Kenneth Rogoff of Harvard University, a former chief economist at the International Monetary Fund. “The oil could bring it to a whole new level.”

José Sergio Gabrielli, Petrobras chief executive, says neither the company nor the country’s oil industry has so far been big enough to become a government cash cow. But with the new discoveries, which stretch across an 800km belt off the coast of south-eastern Brazil, this is going to change. The oil industry could grow from about 10 per cent of GDP to up to 25 per cent in the coming decades, analysts say. To curb any negative effects, Brazil is trying to support domestic manufacturing by increasing “local content” requirements in the oil industry.

Without a “firm local content policy”, says Mr Gabrielli, Dutch disease and the oil curse will take hold. However, “if we have a firm and successful local content policy, no – because other sectors in the economy are going to grow as fast as Petrobras”.

The company has set a target of 53 per cent local content for new oil projects, compared with the old compulsory minimum of 30 per cent. This policy will be put to the test by the new discoveries, which will require scores of oil tankers, platforms and drilling rigs. Petrobras is planning to invest an initial $224bn in the discoveries by 2014. Last year, it raised $70bn from the world’s largest equity offering to finance the plan.

The other long-term dividend Brazil is seeking from the discoveries is in R&D. Extracting oil from beneath a layer of salt at great depth, hundreds of kilometres from the coast, is so challenging that Brazilian engineers see it as a new frontier. If they can perfect this, they can lead the way in other markets with similar geology, such as Africa.

Segen Estefen of Coppe, the Federal University of Rio de Janeiro’s engineering centre, says the institution is developing a technology hub at llha do Fundão in the city’s Guanabara Bay to help exploit the discoveries. International oil services companies, including French-based Schlumberger, and multinationals such as IBM and General Electric, are setting up laboratories. “The example of Silicon Valley can be applied here,” he says.

For its part, Petrobras is spending $800m-$900m a year over the next five years on R&D, and has invested $700m in the expansion of its research centre, Cenpes, located near Coppe.

However, analysts believe that some government efforts to capitalise on the discoveries risk backfiring. To try to enforce the local content system, Brasília has made Petrobras the sole operator of fields in the new discoveries, with a minimum 30 per cent stake in any project in the area. In the past, any company could bid for a block on an equal footing. It has also set up a 100 per cent government-controlled company that will have the power of veto over investment decisions in each block.

Making Petrobras the sole operator will reduce competition, analysts say. In addition, there are worries that both the oil company and its local suppliers are becoming overstretched. Petrobras recently pulled out of oil exploration in Cuba, for example, citing investment commitments at home.

“Given that local suppliers are already struggling to meet Petrobras’ current demands . . . the risk of cost overruns and delays is significant,” Eurasia Group analyst Erasto Almeida wrote in a recent research note on the new discoveries.

Ultimately, Brazil’s ability to avoid Dutch disease will depend not just on how the money from the oil is spent. The country is the world’s second biggest exporter of iron ore. It is the largest exporter of beef. It is also the biggest producer of sugar, coffee and orange juice, and the second-largest producer of soyabeans.

Exports of these commodities are already driving up the exchange rate before the new oil fields have fully come on stream, making it harder for Brazilian exporters of manufactured goods. Industrial production has faltered in recent months, with manufacturers blaming the trend on a flood of cheap Chinese-made imports.

“Brazil has everything that China doesn’t and it’s natural that, as China continues to grow, it’s just going to be starved for those resources,” says Harvard’s Prof Rogoff. “At some level Brazil doesn’t just want to be exporting natural resources – it wants a more diversified economy. There are going to be some rising tensions over that.”

The government might try to counter any decline in Brazil’s industrial strength by increasing its investment in “local champions” in agriculture and mining. Other areas of industry, such as defence, which has local content requirements, could benefit too. Brazil’s development bank, BNDES, has lent nearly $200bn in the past two years to large companies. It is reducing lending this year but will remain one of the nation’s biggest creditors.

The government is also seeking to extract social benefits from the discoveries by setting up a sovereign wealth fund that will invest in education and other long-term initiatives.

But while analysts laud the idea of the social fund, they are concerned that the government could become too heavy handed in the management of the proceeds, leading to politicisation of large state-owned companies such as Petrobras. President Dilma Rousseff, the development economist whose Workers’ party leads the ruling coalition, recently passed a law requiring union representation on the boards of all state-owned companies.

Harvard’s Prof Rogoff says the graduate school line on countries endowed with natural resources is that they should focus less on possible ill effects. Rather than trying to control the value of their currencies, for example, they should invest in areas that will bring long-term productivity gains, such as infrastructure and education.

Although Brazil has made strides in improving education, and its infrastructure is better than that of other emerging markets such as India, it is still lagging behind developed economies in both areas. Its government is also cumbersome. At about 40 per cent of GDP, its public spending is equivalent to that of many developed economies without corresponding levels of productivity. Politicians recently added insult to injury for long-suffering taxpayers by awarding themselves a 60 per cent pay rise.

Ultimately, once the oil dollars start flooding in, it is this kind of complacency that may be the biggest danger for Brazil. Even Norway, widely seen as the best example of how to manage an oil windfall, has trouble energising its economy.

“It’s a little bit like you’ve gotten rich, and how do you prevent your kids from being lazy? There’s a little bit of that to the Dutch disease,” Prof Rogoff says.