Controlled prices or free market? The Petrobras dilemma

. May 28, 2018
petrobras brazil oil prices Protesters ask for lower oil prices. Photo: Petrobras
petrobras brazil oil prices

Protesters ask for lower oil prices. Photo: Petrobras

Founded in 1953, Petrobras has grown to become the country’s largest corporation, being featured in the Fortune 500 list for 23 straight years. Brazil’s oil and gas company is a mixed-capital company. Its shares are split between the federal government – which has a 50.26 percent stake – and private investors.

The company went public during Fernando Henrique Cardoso’s administration, and its stock is now traded in stock markets of São Paulo, New York City, Madrid, and Buenos Aires. Still, Brazil’s federal government retains its role as controller and manages nearly two-thirds of the voting shares. In addition to the shares held by the government, Caixa and the National Development Bank (BNDES) own a combined 13 percent of the company.

Petrobras also has preference shares. While these might not grant the right to vote, their owners – who are predominantly private investors – are still entitled to a share of the profits. 

</p> <p>The diverse profile of stakeholders, however, has created a rift between the government, which calls the shots, and minority owners. One side considers the effects of Petrobras’ role in governmental policies and its institutional symbolism, whereas the other is simply more interested in the company’s financial results.</p> <p>That division becomes more apparent in situations such as this one. Petrobras’ pricing policy is at the center of the trucker protests causing fuel and food shortages all over Brazil, generating losses of more than BRL 10 billion after just a few days. Since 2016, the company has changed its prices daily according to the international fluctuations of oil prices. Yet it hasn’t always been like this.</p> <h3>Petrobras under Dilma Rousseff</h3> <p>Dilma Rousseff’s administration was constantly accused of using the state-owned oil and gas company as an instrument to control inflation rates. Regardless of what occurred abroad, the government froze prices – especially during the 2013-2014 electoral season – selling below market value at the time.</p> <p>In a country as <a href="">dependent on road transportation</a> as Brazil, if fuel prices increase, hundreds of other prices also follow the upward trend due to rising distribution costs.</p> <p>By holding down <a href="">inflation rates</a>, Dilma Rousseff was able to cash in politically and create a false impression that Brazil was not severely hit by the 2008-2009 global financial crisis. While that might have curbed inflation, it also accumulated billion-dollar losses. Petrobras finished the 2015 fiscal year (the last before Rousseff’s impeachment) in a BRL 38bn hole.</p> <p>When the government was no longer able to hold down pricing, however, inflation rates exploded. In December 2015, they reached 10.67 percent.</p> <p>Late last year, federal prosecutors pressed charges against former Petrobras CEO Maria das Graças Foster and former Finance Minister Guido Mantega for conduct adverse to the interests of the company. Another five individuals, all members of the board, were also charged.</p> <h3>Pedro Parente and the “invisible hand”</h3> <p>In 2016, after Dilma Rousseff was evicted from the presidency, President Michel Temer named Pedro Parente as the new Petrobras CEO. The executive stated that the company would adopt a new pricing policy “with no political interference whatsoever.”</p> <p>In October that same year, the fuel sold to refineries had its prices set monthly according to oil prices in the international market (which are, of course, in U.S. dollars). The company also announced that it would not sell fuel below the international price, marking the end of subsidies to the product.</p> <p>Petrobras revisited that strategy midway through 2017, determining that monthly price changes weren’t enough to keep up with the volatility of international oil prices. From July 3 on, the price revisions were to take place “at any moment, even once a day.”</p> <p>That was also the point when crude oil started to become increasingly more expensive. In December 2017, one liter of gasoline hit BRL 4 for the first time since the policy had first been implemented.</p> <h3>What’s the solution?</h3> <p>Both models have clear pros and cons. And both have generated their own sets of crises. Dilma Rousseff’s price-controlling policies (along with corruption) helped turn Petrobras into the world’s <a href="">most-indebted oil company</a>. However, rising fuel prices sparked the truckers’ protest that pushed Brazil into chaos.</p> <p>Part of the problem lies with Brazil’s inability to produce oil derivatives, including fuels. The need for imports – especially of American diesel – turns fuel into a very expensive product. Increasing Petrobras’ capacity to refine the oil it produces would protect the company from international pressures.</p> <p>Although Pedro Parente’s pricing policy might be a <a href="">financial success</a>, proven by the BRL 6.9bn profit over 2018’s first quarter (a 56 percent increase from last year), we must not forget that Petrobras is a state-owned company. Its purpose is not to generate bonuses for stakeholders.

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