Arm wrestling with the government disrupts fuel price decision

Since the weekend, the government has been experiencing an internally created impasse over what measure to adopt to avoid the explosion in fuel prices in the domestic market, caused by the accelerated rise in oil prices with the invasion of Ukraine by Russia.

The concern is to act quickly to stop the impact of the rise in oil derivatives on consumers’ pockets in an election year. The interpretation of President Jair Bolsonaro’s allies is that the lack of control in the prices of gasoline, diesel and cooking gas, in addition to the high inflation that will come from this extra cost, will be harmful to his reelection. The recommendation is that he make a decision as soon as possible.

However, as occurred in other delicate moments for the government, the issue generated an arm wrestling in the top management, putting the Ministry of Economy and the Ministry of Mines and Energy, accompanied by the political wing closest to the president, on different sides.

The possibilities will be discussed at a meeting at Planalto this Tuesday (8) with ministers Paulo Guedes (Economy), Bento Albuquerque (Mines and Energy), Ciro Nogueira (Casa Civil) and the president of the Central Bank, Roberto Campos Neto.

If it were up to Bolsonaro alone, this would be the moment for Brazil to suspend the use of the international parity of the value of oil to readjust fuels in the domestic market. He made his position clear in a radio interview on Monday morning (7). The speech, considered interventionist, dropped Petrobras shares, which closed the trading session with a drop of 7%.

The MME (Ministry of Mines and Energy) together with a more political wing of the government, despite not liking parity, believes that changing this rule now, in an election year, would harm the president’s reelection. The group wants the adoption of the subsidy to hold the price.

Some argue that the measure should also apply to private importers, not just Petrobras. Private imports already account for around 20% of domestic supply. Excluded, these companies would not be able to sustain the lag, which would lead to a drop in supply and a lack of fuel in a short time.

Supporters of the subsidy propose that the government declare a state of calamity, claiming that Brazil is suffering from the effects of the war in a foreign country, and adopt supplementary credit to provide price stability in the domestic market.

The Ministry of Economy considers the alternative to be reckless for the public coffers on the grounds that there is no way to know how far the war and the price of a barrel will go, and costs would be uncontrollable. Preliminary calculations by the ministry indicate that the cost could exceed R$ 100 billion, depending on the course of the war.

The Economy defends the approval of the measures that are being processed in Congress, under the rapporteur of Senator Jean Paul Prates (PT-RN), including the proposal to change the adjustment calculation, which suggests average prices.

However, in the short term, in a change of attitude considered unexpected by the market, the ministry suggests that Petrobras offer a contribution to relieving the crisis, absorbing the rise in international prices and holding the readjustments provisionally. Declaring calamity would be a second option if the conflict continued.

The proposal would have to be approved by the board of directors and divides members of the state-owned company. If on the one hand, in fact, there is financial space to provisionally absorb the freeze, since the state-owned company had a historic profit of R$ 106.6 billion last year, the measure is also seen as an intervention.

For analysts, the measure may cause not only the fall in the value of the share, but the downgrade of the state-owned company’s rating in risk rating agencies. There would also be the already mentioned adverse effect of leading to shortages in the market, since private importers would continue to be exposed to international increases and would not be able to compete with the state-owned company’s price freeze.

For almost two months, Petrobras has not made any fuel adjustments. The lag is 26% for gasoline and 30% for diesel in relation to the international price. On Sunday (6), it reached close to US$ 140 (R$ 708), close to the record of US$ 147.50 (R$ 746) of July 2008. This Monday (7), the value dropped, closing at US$ 123.89 (R$ 626.54), but the instability scenario makes the price uncertain.

Economists and experts in the energy sector claim that all the alternatives being discussed by the Brazilian government create unnecessary risks, because price intervention is an extreme measure with uncontrollable side effects.

“What we are seeing is the biggest oil crisis since the 1970s, and most countries are watching and waiting to see the consequences, which are still unpredictable,” says Marcio Felix, former executive secretary of the MME. He recommends caution, because the conflict scenario is uncertain.

The rise in oil reflects the risks created in the global market with Russia’s invasion of Ukraine, and is driven by the escalation of sanctions against the government of Vladimir Putin. US President Joe Biden announced on Tuesday that he had ordered an embargo on US imports of Russian oil and gas.

In an attempt to isolate Russia from the energy market. The United States has sought alternatives even among former opponents, such as Venezuela.

“The world is having to swallow this rise in oil, few countries have adopted any measure to contain it, and those who adopted preferred specific actions, such as the offer of vouchers for drivers to supply, in the case of Portugal, or aid to fishermen, in Japan” , says Marcos Mendes, associate researcher at Insper and columnist at sheet.

“Given this international scenario, this leads us to believe that it is our political conditions that make the government seek price control”, he says.

Mendes participated in the elaboration and monitoring of the subsidy program for truck drivers shortly after the 2018 strike, during the government of Michael Temer. He states that the complexity of this type of measurement is immense.

“In the private market there are different types of contracts, terms and more than 100 types of prices, and each measure tends to generate a distortion for which we run the risk of not having a solution, such as a shortage or disincentive to production”, he says.

Décio Oddone, who was general director of the ANP (National Petroleum Agency) also recalls that the Brazilian market has undergone changes in recent years, which reduced the participation of the Brazilian state-owned company.

“Intervening in Petrobras is useless, because today there are many players in the market,” he says. “It will only break with an internationally accepted model, generating more problems. for the company and for the country.”