Global Insight Perspective | |
Significance | The fuel-price freeze had helped the government's fight against inflation, but had resulted in Petrobras forfeiting potential revenue from domestic fuel sales. |
Implications | The widening differential between domestic and international prices, increased production costs, and the need for additional investment to develop new finds have all increased pressure on Petrobras to implement fuel hikes. |
Outlook | It is too early to tell whether the announcement marks a shift in the company's fuel-price policy, but what is clear from the government's response is that controlling inflation continues to a national priority and that this will continue to influence any future fuel-price decision. |
Petrobras Announces Fuel-Price Hike
The Brazilian state oil company Petrobras has announced that it will increase petrol (gasoline) prices at the refinery gate, before taxes, by 10% and diesel prices by 15%, with effect from 2 May. This is the first increase by Petrobras since September 2005 and follows mounting speculation by the Brazilian media that domestic price hikes could be on the way to reflect new record international oil prices. Another source of pressure has come from Petrobras's own exploration successes. The recent discoveries in the pre-salt layer will require additional investments by the company and there is a growing perception that it can no longer afford to forfeit potential revenue from domestic fuel sales. A report by Bloomberg this week based on an interview with the company's financial officer Almir Barbassa suggested that Petrobras could quadruple its bond sales to finance the development of new finds, but if the increase in its debt can be limited by improving its cash flow this would be welcomed. In the case of diesel, Petrobras has also been losing money because it needs to import some diesel fuel to cover domestic demand.
Renewed concerns about inflation as a result of rising food prices along with a controversial interest rate hike earlier this month meant that there had been some speculation in recent days that the fuel-price hike might be delayed. Instead, the price increases at the refinery level are set to go ahead, but the government is taking steps to try to limit the impact on inflation. Brazil's Finance Minister Guido Mantega announced that the Cide fuel tax would be reduced from 0.28 reais (US$0.17) per litre to 0.18 reais per litre on petrol in order to ensure that there was no price change at the pumps for consumers. However, Mantega acknowledged that although the Cide tax on diesel would be cut from 0.007 reais per litre to 0.03 per litre, the price adjustment at the refinery level was likely to translate into average increases at the pumps of 8.8% for diesel prices, resulting in a 0.015% increase in inflation. Mantega also said that the reduction in the Cide tax would result in the government losing 2.5-3 billion reais in revenue a year, but that this would be compensated by higher profits for Petrobras.
Outlook and Implications
Following the deregulation of the domestic fuel market in January 2002, Petrobras initially adjusted its wholesale fuel prices depending on international oil prices and fluctuations in the exchange rate, changing them as often as every two weeks. The Worker's Party (PT), which took office in January 2003, had been fiercely critical of these frequent price increases while in opposition. Once in government, the PT government did not formally re-impose price controls on fuels. However, there has been a marked change in Petrobras's price-setting formula. Fuel-price adjustments have been far less frequent, with Petrobras reluctant to react to “atypical” movements in international oil prices and arguing that increased domestic production precluded the need for domestic prices to follow international prices so closely.
This policy helped the Brazilian government to rein in inflation in the early years of President Lula's administration, but it has not been without its costs. Not only has it resulted in the Brazilian state oil company forfeiting potential revenue, but it has made it difficult for private refiners to remain operational. The takeover of Ipiranga by Petrobras, Braskem, and Ultrapar means that the later is no longer such an important issue, but the price hikes should improve Petrobras's refining margins and hopefully reverse its recent fall in profits.