Opinion: Milking Brazil’s Most Sacred Cow

Opinion, by Michael Royster

RIO DE JANEIRO, BRAZIL – The most sacred cow in Brazil is Petrobras. When calved in 1953, its birthright included a monopoly over the exploration, production, development, refining and distribution of oil and gas. It lost most of that monopoly in 1995, but it’s never lost its monopolist mentality.

Worse yet, during their terms as President, Lula and Dilma treated Petrobras as their own private political preserve. Lots of their machinations involve refineries, where Petrobras still has over 95 percent of the national capacity – that’s the one monopoly the government never relinquished.

Back in the giddy go-go days, Lula and his Venezuelan buddy Chavez cooked up a deal to build a jointly-owned refinery located in Brazil’s Northeast. Around the same time, Lula called for two other new refineries, also in Brazil’s Northeast, which were rewards to political bosses who had delivered overwhelming majorities to Lula in his election campaigns and would do the same for Dilma.

After the Petrolão scandal revealed the sacking of Petrobras by pettifogging politicians, the two new refineries were cancelled before construction began, having cost Petrobras over US$1 billion. The joint venture cost over US$20 billion and functions at half capacity. Lava-Jato investigators have already brought charges against those responsible.

Why concentrate on refineries? Why increase the Petrobras monopoly? The answer is quite simple: refineries control the price of oil at the service station pumps.

The price at the pumps is a significant part of the consumer price index. If you control the price of gas you control inflation and make voters happy. President Dilma forced Petrobras to maintain the price from the refineries at artificially low levels, and she was rewarded with re-election in 2014.

Between corruption and price controls, Petrobras nearly went broke.

Fast forward to early 2018. Dilma is long gone, Temer is President, and the newly-appointed Petrobras Directors have decided to try to recoup the company’s losses from the Lula/Dilma years, by increasing the refinery prices whenever they can, using rising international crude oil price as an index.

The result was the disaster known as the nationwide teamsters strike. Truck drivers, faced with costs rising fifty percent over less than a year, with no corresponding increase in their revenue, simply said “no more”. The feckless Temer government, dedicated to using free-market practices for Petrobras, was brought to its knees.

It had no effective answer to this problem, and still has no answer. First it said it wouldn’t tell Petrobras how to set its prices, but it did tell them when to set prices, which is the same thing. Then it guaranteed the truckers a reduction in the price of diesel fuel at the pumps, which didn’t happen because Petrobras doesn’t control retail sales.

The latest ham-fisted attempt at intervention was to fix minimum freight prices for road haulage. The truckers are over the moon, but the producers of the goods being hauled face a fifty percent increase in the cost to get their goods to market. Agribusiness, Brazil’s biggest and most important lobby, went berserk. Lawsuits fly about, but nothing is resolved.

It all could have been avoided years ago, of course, if the government had ever ceased trying to milk its most sacred cow for political purposes.