How the hike in oil prices affects Brazil

On Monday, truck drivers blocked dozens of roads across 19 Brazilian states. They were protesting the latest rise in diesel prices. Since July 2017, diesel users have been grappling with a 21-percent price hike – but they are hardly the only ones with such an experience. In May alone, fuel prices have risen 12 times. Despite the protests, fuel prices are set to increase yet again – and gas distributing companies will pay BRL 2.37 per liter today, as opposed to BRL 2.34 yesterday.

These continual price hikes are a consequence of a new pricing policy set by Petrobras, Brazil’s state-run oil and gas company, midway through last year. To break with the company’s strategy of controlling prices in order to curb inflation rates, an approach adopted during the Dilma Rousseff era, Petrobras started to change its prices daily, following international oil prices.

One year ago, Brent oil was sold in London for less than USD 50 a barrel. Now, it is approaching the psychological threshold of USD 80. Since February, Brent oil prices have gone up 27 percent, to their current price of USD 79.40.

Why have oil prices skyrocketed?

Several things can help explain the rise in prices. One is the mounting tension between the U.S. and Iran. On May 8, U.S. President Donald Trump pulled out of the Iran Nuclear Deal. During a speech, Trump said he did not believe the “decaying and rotten structure” of the current deal would prevent Iran from building nuclear weapons (which is its current aim).

The current context creates barriers for companies wishing to import from Iran – even those that aren’t American.

It doesn’t help that Venezuela, a country that owns the world’s largest oil reserves, is experiencing a full-scale crisis: political quagmires, food shortages, rampant inflation and high poverty rates. As a result, the country – which is a member of the intergovernmental group Organization of the Petroleum Exporting Countries (OPEP) – is having trouble producing oil.

In 2015, Venezuela was the world’s sixth-largest exporter of the commodity. In January, however, the South American country posted its worst results in 28 years.

The U.S. threatened to levy further sanctions against Venezuela because of the election. It didn’t take long for those threats to become reality, however, as the Trump administration began to follow through on its remarks by Monday. Trump has issued an executive order banning U.S. citizens from involvement in sales of Venezuela’s accounts receivables related to oil and other assets.

Flexible-fuel vehicles

Brazilians are relying more on flexible-fuel vehicles – that is, cars that run on both gasoline and ethanol. In 2016, 88 percent of sold cars were ‘flex’. Ethanol is less potent than gasoline, but it is worth choosing if it’s at least 30 percent cheaper. In São Paulo, ethanol is already 44 percent cheaper, according to Brazil’s National Petroleum Agency.

Good for Petrobras

Petrobras’ new pricing policy follows the oscillations of the international Brent oil market. But as oil becomes more expensive, so will fuel in Brazil. The immediate effect of this policy is pushing up inflation rates – although they are currently very low, hovering below 3 percent for the past 12 months. Since Brazil depends almost entirely on road transportation, more expensive fuels could impact certain products, as suppliers will pass along any extra costs associated with transportation to consumers.

But if the average consumer might have a hard time, the new pricing policy is positive for Petrobras. In fact, it’s actually helping the company recover from what’s turned into its worst crisis since its creation in 1953. Ravaged by corruption, Petrobras found itself at the center of Brazil’s most emblematic anti-corruption investigation, Operation Car Wash. Other reasons also played a factor, such as Dilma Rousseff’s price-controlling policy and the international drop in oil prices.

Now, Petrobras seems to be getting back on track. Between 2014 and 2017, the company’s market value dropped from BRL 214 billion to only BRL 67 billion. On May 10, 2017, however, the company was valued at its highest-ever: BRL 360 billion. Over the year’s first quarter, the state-run firm posted a BRL 6.9 billion profit.

And that helps explain why the government is not willing to change the pricing policy. That being said, the recent protests have raised red flags in the presidential palace. Four and a half months prior to the big election, no party wants to give voters an extra reason to complain; the government is therefore expected to intervene to lower fuel prices.

The most likely solution will be slashing social security taxes on fuels. Taxes account for almost half of fuel prices.

The problem? The government is in desperate need of that money.