July 25 (Bloomberg) -- Crude oil at $126 a barrel is ``not expensive,'' considering production costs and rising demand, said Jose Sergio Gabrielli, chief executive officer of Brazil's government-controlled oil company, Petroleo Brasileiro SA.

``Oil is an exhaustible resource,'' Gabrielli said in an interview today in Rio de Janeiro. ``In order to produce new oil to replace the barrel you just used, you have to find oil that's much more expensive than what you already produced.''

With a $112 billion, five-year investment plan, Petrobras is tapping giant deepwater reserves including the Tupi field, the Western Hemisphere's largest oil discovery in three decades. Tupi may hold as much as much as 8 billion barrels of oil equivalent, Gabrielli said in November. That's enough to supply every refinery on the U.S. East Coast for 15 years.

Gabrielli's views contrast with those of Jesus Reyes Heroles, CEO of state oil company Petroleos Mexicanos, the third- largest oil supplier to the U.S. He said in a July 21 interview that the price of a barrel of oil would be about $80 without the effect of market speculation.

Gabrielli also said that oil production has limitations that can't be overcome in the ``short run.'' Geological, infrastructure and geopolitical constraints ``do not allow us to think that in the next four or five years we are going to have any dramatic change in supply,'' he said.

Economic growth in emerging-market countries is a major factor driving demand for oil, Gabrielli said.

Reducing Poverty

``Millions of people in those countries are moving from rural areas to urban areas, and there is a major reduction in poverty as well,'' he said. ``Both movements are boosting consumption of energy and food.''

Brazil's economy expanded 5.8 percent in the first quarter from a year earlier. In China, gross domestic product rose 10.1 percent in the second quarter, while in India the economy expanded 8.8 percent in the first quarter.

Oil prices have slipped more than $23 a barrel since reaching a $147.27 record on July 11 on speculation U.S. demand will decline. Crude oil for September delivery fell $1.31, or 1.3 percent, to $124.18 a barrel at 12:45 p.m. on the New York Mercantile Exchange.

Petrobras will start production on its first so-called pre- salt field off the coast of Espirito Santo state in early September, Gabrielli said. These deposits are beneath as much as 3,000 meters (9,840 feet) of water and 7,000 meters of seabed.

Pre-salt discoveries near Rio de Janeiro and Sao Paulo, including the Tupi field, will at least triple Brazil's oil reserves, Brazilian President Luiz Inacio Lula da Silva said in a June interview. Petrobras has about 13 billion barrels of proved reserves.

To contact the reporter on this story: Adriana Brasileiro in Rio de Janeiro at abrasileiro@bloomberg.net

Last Updated: July 25, 2008 13:26 EDT