Fuel Prices Rise with Inflation in Brazil

By Dorien Boxhoorn, Contributing Reporter

RIO DE JANEIRO, BRAZIL – While Petrobras is launching its largest investment program in the oil exploration and production industry yet, the fuel prices continue to rise steeply in Brazil. These high fuel prices have been adding to Brazil’s already increasing inflation, and in an attempt to keep the inflation under control the government has reduced the CIDE tax on gasoline sales.

Inflation has been a problem for the Brazilian economy this year. Antonio Henrique Silveira, Secretary of Economic Affairs at the Finance Ministry, explains the current reduction of the CIDE tax: “Our intention is to neutralize the small increase in the price [of oil] that would happen from October forward.”

Last May, the government lowered the price of gasoline at the pumps throughout its downstream division of Petrobras, BR. This division holds over 7,000 pumps over Brazil, and by decreasing the prices at these gas stations, other gas stations were forced to lower their prices as well.

Although Brazil seems to have plenty of its own fossil fuels, it has had to increase the import of gasoline to meet domestic demands. Petrobras is producing crude oil from its wells, but Brazil does not have enough refining capacity to fulfill its domestic demand for refined products such as gasoline.

As a result, Petrobras imports refined oil, whereas crude oil is exported. Over the second quarter of this year, Petrobras imported more than two million barrels of gasoline. The difference between the export and the import of oil resulted in missed revenues of R$2 billion ($1.1 billion).

The government is concerned that the rising price of fuel will drive up the inflation rate even more. The annual inflation in mid-September was 7.33 percent, the highest rise in six years.

At the same time, the exchange rate of the dollar when compared to the real increased about fifteen percent over September. Because oil is traded in U.S. dollars, this immediately affects the price of refined oil in Brazil.

The increasing demand of gasoline cannot be explained only by the emerging Brazilian economy. The disappointing harvest of sugarcane, which was largely damaged by cold weather, has risen the price of ethanol as well.

Ethanol is extensively used by Brazilians as a biofuel for cars. The shortage of ethanol caused the government to reduce the percentage of ethanol in the mix with gasoline at the pump from 25 percent to twenty percent ethanol.

Petrobras is a state owned company, with the government owning 54 percent of the shares. Formally the oil giant is free to set its own fuel prices, but it is the Brazilian government that has de facto control over the prices of gasoline through different taxes (such as the CIDE tax).

Petrobras’ CEO Jose Sergio Gabrielli is not concerned about the announced measures, as he explained in a press release last week: “We collect the CIDE, and we are going to collect whatever is defined by the Finance Ministry. The tax cut will not have any impact on the company’s cash flows because the company routes the collected tax proceeds directly to the government.”

Taxi driver Guillerme Perreira is content with the announced reduction of the CIDE tax. “The prices for gasoline and natural gas are very high, [and] this is difficult for me as I have to work longer to maintain the same level of income.”