In diesel, the difference is 13%; fuel adjustments remain a challenge for Petrobras’s top management
04/08/2024
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Bráulio Borges — Foto: Ana Paula Paiva/Valor
Amid discussions about Petrobras’s leadership, adjusting fuel prices remains a challenge for the state-owned company’s top management. The recent increase in oil prices has intensified pressure for an adjustment in gasoline and diesel prices to align with international market rates. Average projections from three consultancies and trade associations, as reviewed by Valor, indicate that as of Friday, Petrobras’s refineries were selling gasoline at prices 17% below international parity. For diesel, the disparity was 13%.
If Petrobras fails to adjust fuel prices for longer—in the current scenario of rising oil prices—it may see a decrease in profitability as happened in the past. In previous Workers’ Party (PT) administrations, the company went for long periods without adjusting gasoline and diesel prices, which led to losses and an increase in debt. It took years for the oil giant to fix its finances.
Between 2008 and 2012, the practice of retaining prices also reduced government revenue with taxes on Petrobras’s activities by 31.6%, as Valor reported in 2014. From 2008 to 2013, taxes paid by Petrobras fell from 2.1% of GDP to 1.6%.
On the other hand, if Petrobras increases its product prices in the domestic market, as is recommended in times of high oil prices, political pressure on the company tends to increase.
No government likes it when Petrobras increases fuel prices, as the decision is unpopular and boosts inflation. Something similar happened during the Bolsonaro administration. However, price adjustments are required to keep the company’s financial health when the scenario points to an increase in Brent prices, experts say.
To meet demand, around 30% of the diesel sold in Brazil is imported. Whenever oil prices rise abroad, Petrobras needs to pass on the rise to the domestic market. Last year, diesel supplied by Russia at lower prices helped ease the discussion about fuel adjustments. Russia outperformed the United States, a traditional exporter to Brazil.
In May 2023, Petrobras changed the pricing policy that had been in place since the Temer administration, known as Import Parity Price (IPP), which linked domestic prices to international prices.
Under the current administration, Petrobras introduced a new pricing policy, called “commercial strategy.” The model was poorly received by the market due to its lack of transparency and predictability regarding price adjustments. Petrobras has repeatedly argued that no company in any sector is required to disclose how it decides its prices. That would be a matter of commercial strategy in the face of competition.
The discussion about pricing has lost relevance since oil prices eased in 2023, according to Bráulio Borges, a researcher at the Fundação Getulio Vargas’s Brazilian Institute of Economics (Ibre-FGV) and an economist at LCA Consultores. “But that is still a matter of concern as history shows that the practice of keeping domestic prices below international prices for a long period affected the company’s profitability in the past.”
If new shocks arise on the international scene, the issue could return to the spotlight, he points out. Mr. Borges adds that the practice could also lead to a shortage in the domestic market since national production alone is not enough to meet diesel demand.
Two reasons are currently strengthening the adjustment scenario: the price of Brent broke the level of $90 per barrel for the first time in six months, and the exchange rate was traded above R$ 5 last week, leading the Brazilian Central Bank to intervene in the market with auctions. The exchange rate and Brent prices are the main variables for the adjustment.
Considering the market closing on Friday (5), consulting firm StoneX indicates a 12% gap in diesel prices, or R$ 0.42 per liter, and 12.6% in gasoline (R$0.35 per liter). The Brazilian Infrastructure Center (CBIE) estimates an average gap of 25.92% in gasoline prices, or R$0.98 per liter, and 8.22% in diesel prices (R$0.31 per liter). The Brazilian Association of Fuel Importers (ABICOM) estimates an average gap of 12% for gasoline (R$0.48 per liter) and 19% for diesel (R$0.65 per liter).
Petrobras changed gasoline prices for the last time on October 21, reducing them by 4.1% (R$0.12 per liter). Diesel prices haven’t changed since December 27, when the company reduced prices at its refineries by 7.94%.
In 2022, with record-high earnings of R$188 billion, 77% more than in 2021, Petrobras paid approximately R$248 billion in current values to the federal government (R$103 billion in taxes, R$86 billion in royalties and participations, and R$59 billion in dividends). The increase was explained in part by cyclical factors, as the international parity price (IPP) was based on international oil prices and the exchange rate.
At the time, the company attributed the record results to the rise in oil prices due to the onset of the Russia-Ukraine war. Several analysts consider the IPP a more transparent policy, closer to market fluctuations than the current model—which tended to maximize results.
Except for in 2020—the onset of the COVID-19 pandemic—the collection of Tax on Circulation of Goods and Services (ICMS) on fuels, in 2023, was at the lowest level to the total tax revenue in the country, considering the past decade. The tax revenue with fuels corresponded to 16.6% of the ICMS collected, compared to 17.7% in 2022.
The loss of share in 2023 resulted from a reduction in the ICMS rate following legal measures by the government in 2022 amid the electoral race in which then-President Jair Bolsonaro tried to fight inflation pressures. At the time, fuel prices contributed to the increase in the Extended Consumer Price Index (IPCA). The government’s decision reduced the ICMS on electricity, telecommunications, and transportation.
“The measure was a mistake since the government intended to influence prices by limiting the legal rate on gasoline,” said Felipe Salto, an economist at Warren Rena and former Secretary of Finance of São Paulo.
According to Mr. Salto, the measure shows how much fuel is a sensitive item in inflation, weighing on consumers, and also the impact on revenue, given its representation in the states’ ICMS revenue.
“Decisions to intervene in fuel price policy are worrying. We do not know whether it will be done, but it would be bad as it could impact the economy and affect tax revenue,” said Mr. Salto.
“We started to consider our best refining and logistics conditions to practice competitive prices, competing in the market with other players selling fuels in Brazil; and to mitigate external volatility, providing periods of price stability to our customers, as is currently the case,” Petrobras stated.
Carlos Kawall, an economist at Oriz Partners, argues: “The worst thing to do would be to make political use of that and follow the path of populism to hold down fuel prices, not only using the federal government funds but also affecting Petrobras management by providing subsidies for gasoline, which benefit the higher classes and go against decarbonization.”
The central government and federated entities benefit from taxes on Petrobras’s fuels. ICMS is a state tax incorporated into the prices charged at refineries and began to have a fixed value in 2022, when then-President Bolsonaro approved an act eliminating the percentage charge.
According to a person familiar with the matter, the fixed ICMS rate prevents revenue from changing even if the state-owned company changes prices. The tax was previously levied based on a percentage of the fuel liter at refineries, defined by each state. “Now, when fuel prices are high, it may affect consumption, but not tax revenue,” the source points out.
According to this person, who engaged in discussions about the ICMS, the measure is positive, as it makes taxation more predictable. In 2024, the ICMS on gasoline is R$1.37 per liter, and on diesel, at R$1.06 per liter. The federal gasoline tax is made up of federal contribution CIDE and social taxes PIS, PASEP, and Cofins.
*Por Fábio Couto, Kariny Leal, Marta Watanabe, Estevão Taiar — Rio de Janeiro, São Paulo, Brasília
Source: Valor International