Long-term Themes May 23, 2023 / 02:09 pm UTC

Brazil: Petrobras Changes its Fuel Price Policy. Who Pays for it?

By Lucas Eduardo Veras Costa

Petrobras announced a major change in its fuel pricing policy, shifting from aligning with international rates to considering internal costs as well. The new formula's introduction raises doubt about the future, as it allows potential political exploitation and the use of Petrobras' resources to sustain lower fuel prices, which may be disapproved by market players, but it would also allow the company to continues the past policy under a new name.

Figure 1: Petrobras Distribution Prices, International oil Prices and Gasoline CPI (Aug-2019 = 100)

Source: Petrobras, IBGE and Datastream

Petrobras has recently announced a significant change to its fuel pricing policy. Since 2016, the state-owned company had been following a practice of aligning its distribution prices with international rates, which were influenced mainly by two factors: exchange rates and global oil prices. However, the new policy introduces an additional consideration of internal costs alongside international prices. Presently, approximately 50% of Brazil's fuel is produced domestically, while the remaining 50% is imported. Although Brazil is self-sufficient in oil production, its refinery capacity is limited.

This new pricing measure, which lacks transparency, raises concerns as it grants Petrobras the freedom to implement any policy it deems fit. Petrobras has provided limited information regarding refinery costs, making it challenging to calculate the variance between international prices and internal costs. In the past, whenever Petrobras' prices fell below international rates, the difference had to be covered by someone—either the government through subsidies or Petrobras itself, incurring losses that were offset by its balance.

The specific direction Petrobras intends to pursue with its fuel pricing policy remains uncertain. Alongside the introduction of the new pricing formula, Petrobras has announced a reduction in distribution prices. However, this reduction aligns with the decrease in international oil prices when converted to Brazilian Real (BRL), influenced by recent currency appreciation and a slight decline in Brent prices. One possibility is that the new formula was designed in response to political pressure from President Lula, and Petrobras chose the opportune moment to announce it alongside a reduction in fuel prices that would not directly harm the company. It is worth noting that Petrobras has also paid its investors the highest dividends, reflecting the company's profitable performance in 2022, driven by higher international oil prices.

Overall, the introduction of the new pricing formula raises more doubts than certainties. It is conceivable that the fuel pricing policies will remain broadly unchanged but rebranded. However, if the government intends to exploit Petrobras for political purposes and pursue an unsustainable fuel pricing policy, the door is now open for such actions. In such a scenario, it is possible that Petrobras' financial resources may be employed to sustain lower fuel prices, a move that market players would likely disapprove of.

4Cast Ltd. and all of its affiliates (Continuum Economics) do not conduct “investment research” as defined in the FCA Conduct of Business Sourcebook (COBS) section 12 nor do they provide “advice about securities” as defined in the Regulation of Investment Advisors by the U.S. SEC. Continuum Economics is not regulated by the SEC or by the FCA or by any other regulatory body. This research report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Nonetheless, Continuum Economics has an internal policy that prohibits “front-running” and that is designed to minimize the risk of receiving or misusing confidential or potentially material non-public information. The views and conclusions expressed here may be changed without notice. Continuum Economics, its partners and employees make no representation about the completeness or accuracy of the data, calculations, information or opinions contained in this report. This report may not be copied, redistributed or reproduced in part or whole without Continuum Economics’s express permission. Information contained in this report or relied upon in its construction may previously have been disclosed under a consulting agreement with one or more clients. The prices of securities referred to in the report may rise or fall and past performance and forecasts should not be treated as a reliable indicator of future performance or results. This report is not directed to you if Continuum Economics is barred from doing so in your jurisdiction. Nor is it an offer or solicitation to buy or sell securities or to enter into any investment transaction or use any investment service.
Analyst Declaration
I, Lucas Eduardo Veras Costa, the lead analyst declare that the views expressed herein are mine and are clear, fair and not misleading at the time of publication. They have not been influenced by any relationship, either a personal relationship of mine or a relationship of the firm, to any entity described or referred to herein nor to any client of Continuum Economics nor has any inducement been received in relation to those views. I further declare that in the preparation and publication of this report I have at all times followed all relevant Continuum Economics compliance protocols including those reasonably seeking to prevent the receipt or misuse of material non-public information.