Market expects new fuel price readjustments despite ICMS freeze

Despite the governors’ decision to extend the ICMS (Commodity and Services Tax) freeze on fuels, prices remain pressured by the escalation of international oil prices and, given the high lags in relation to abroad, the market expects further readjustments in the country.

Since the last time Petrobras raised gasoline and diesel prices, on January 11, the price of Brent oil has risen 6%.

The freeze was decided in November, with the objective of smoothing the transfers to the consumer of readjustments promoted by the state company. At first, it would last three months, but amid the clash with President Jair Bolsonaro (PL), the governors decided to extend the deadline.

The maintenance of the measure, which would expire on January 31, was anticipated by the Panel column. In a note, the governors announce that taxes will remain unchanged for another 60 days.

In the text in which they announce the decision, they demand that the Bolsonaro government change the policy of international parity in fuel prices practiced by Petrobras since 2016 and pointed out by the opposition and by the president himself as the main cause of the high prices.

Questioning the policy helped convince governors opposed to the extension to approve the measure. Among the signatories of the note, there are open opponents of Bolsonaro, such as the pre-candidate for president João Doria (PSDB-SP), and allies, such as Claudio Castro (PL-RJ) and Romeu Zema (Novo-MG).

ICMS on fuel is charged on a reference price defined by the states every 15 days based on surveys at gas stations. The federal government and the fuel sector claim that the model feeds back the increases, as stations are required to pass on the tax increase weeks after the readjustment.

The governors say that the extension is essential in view of the updating of fuel prices, “until structural solutions for stabilizing the prices of these inputs are established”. The text does not, however, mention what the solutions would be.

“This proposal represents yet another effort with the aim of mitigating the inflationary pressures that so harm consumers, especially with regard to the poorest and most underserved strata of the Brazilian population”, says the note, stating that it is “urgent” to review the Petrobras prices.

The governors and Bolsonaro have been waging a tug of war over fuel prices, which have recorded successive increases. The extension of the ICMS freeze was decided shortly after the government’s announcement of a constitutional amendment project to eliminate federal taxes on fuel.

To put pressure on governors, whom he accuses of being responsible for rising prices, Bolsonaro wants to include the possibility of exempting state tax on products. In their defense, the state governments point to the target for Petrobras’ pricing policy.

Two weeks ago, the company raised gasoline and diesel prices​—by 4.85% and 8%, respectively. The increases, however, were not enough to cover the gap in relation to international quotations and the market sees pressure on the state-owned company for new adjustments.

According to Abicom (Brazilian Association of Fuel Importers), the gasoline sold by Petrobras is currently R$0.27 per liter cheaper than the import parity price. In the case of diesel, the difference would reach R$ 0.30 per liter.

Pressured by political tensions in Europe and the Middle East, the price of Brent oil closed trading this Wednesday (26) at US$ 88.74 per barrel, up 1.79%.

Bolsonaro’s pressure for tax exemption, a measure that would generate a cost of R$130 billion for the public coffers, reflects the government’s concern about the impact of escalating inflation on the October elections, when the president seeks re-election.