Subsidizing fuel prices harms supply, say oil companies

The growing support for intervention in Petrobras’ fuel price policy amid the escalation in oil prices caused by the war in Ukraine generated a reaction from companies in the sector operating in Brazil.

Normally averse to public demonstrations, the IBP (Brazilian Institute of Oil and Gas) said this Monday (7) that the practice of artificial prices can harm the supply of fuel and drive away investments in the sector.

He also said that supply problems could have the opposite effect to what the government wanted, since a shortage of supply would put pressure on final consumer prices, as happened when supply was affected by the 2018 truck drivers’ strike.

“Brazil’s refining capacity does not meet national demand, we need to import between 15% and 20% of demand,” said IBP President Eberaldo de Almeida Neto. “If we maintain artificial prices, it makes no sense to import more expensively to sell cheaper.”

“It is fundamental to guarantee the national supply the practice of market prices, so that agents can import. If only 80% of the demand is met, the final price will skyrocket”, completes the executive.

The IBP brings together the largest companies in the oil exploration and production and fuel distribution sectors in the country. Among its associates are Petrobras and foreign companies, such as the giants ExxonMobil and Shell.

In office since May 2021, Almeida Neto called for a round of interviews to take a position on the price control proposals, which on this second received explicit support from President Jair Bolsonaro (PL) and worry investors.

“The biggest inflation is inflation caused by scarcity. If there is a shortage of fuel, what happened in the 2018 strike will happen: gasoline did not reach the stations and the owner of the station raised the price”, he argues.

Almeida Neto argues that Brazil’s dependence on imported derivatives is a consequence of uncertainties regarding fuel price policy, which prevented investments in expanding the national refining park.

“Because of the history of price intervention, everyone is afraid to invest. That’s why there was no more investment in refining. We think that this intervention generates complicated sequels”, he says.

Petrobras has been trying to sell its refineries since the Michel Temer government, but so far it has only been interested in two medium and large units, the one in Manaus and the one in Mataripe, in Bahia, the only one currently operated by a private group.

Bought by the Arab fund Mubadala, the Bahia refinery has been practicing prices closer to the international market and has already passed on to its customers part of the recent rise in prices, with increases that reached 25% for diesel and 19% for gasoline this Saturday (5).

Shortly after taking over operations, in December 2021, the company announced plans to invest in expanding the unit. His management, however, has not yet commented on the recent price control proposals.

With the crisis in Eastern Europe, says the president of the IBP, Brazil could emerge as an alternative for investors in the sector, since it has oil reserves and a history of fulfilling contracts, but the return of price controls could be an obstacle.

“Brazil would differentiate itself from the rest of the world and would have the opportunity to attract investment, not only in the upstream [exploração e produção de petróleo] how much downstream [refino e distribuição de combustíveis]because investors would see in Brazil a country that follows market rules.”

According to him, the government should focus efforts on policies that benefit the low-income population, without subsidizing the purchase of products by wealthier consumers.

“When a fund is created to finance a large demand like the Brazilian one, we are talking about hundreds of billions of reais. It is necessary to make choices”, he says.

Almeida Marques believes that Brazil faces the current crisis in better conditions than in the oil shocks of the 1970s, as it moved from being an importer to an exporter of the commodity. The rise in international quotations, therefore, has positive effects on government revenue.

In his opinion, the market will remain under pressure in the short term, as it takes time to balance supply and demand conditions, which had already been harmed by the drop in international prices in the pandemic and can now be impacted by sanctions on Russian production.

Higher prices, he points out, enable projects that were abandoned during the pandemic, which took international prices below US$ 10 per barrel. This is the case, for example, of production projects in unconventional reservoirs in the United States.

“To increase production, there is inertia. It ranges from a few months —​​​​as in the case of Iran, which wants to increase production by 1.2 million barrels per day in reactivated fields — to six, seven years to invest in new offshore fields [marítimos]. It really depends on the location and type of deposit.”

Thus, the world must go back to living with more expensive oil, even with the trend of replacing fossil fuels with renewable energies, which had been accelerating but lost a little strength during the pandemic.

“This leads us to believe that regressing to the level of US$ 70 per barrel in a short time is totally unlikely. It would have to increase production and significantly reduce demand for this meeting to take place”, he says. “But four years from now, for example, anything is possible.”