Petrobras Puts an End to Global Fuel-Price Parity

Under the government of President Luiz Inácio Lula da Silva, the Brazilian oil giant says its strategy should take into account the most accessible alternative for consumers

A Petrobras gas station.
May 16, 2023 | 12:48 PM

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Bloomberg Línea — Brazilian oil and gas giant Petrobras (PETR3; PETR4) on Tuesday announced that its board of directors has approved an end to the policy of international parity for gasoline and diesel prices with the US dollar and on the international market for its refined products.

The price-parity policy had been criticized by President Luiz Inácio Lula da Silva since his presidential election campaign last year.

The measure may alleviate the effect of inflation on consumers, given that refined products have been one of the main sources of pressure on prices, and which have also impacted the transportation sector, which in turn raises the prices of food.

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“The readjustments will continue to be made without defined periodicity, avoiding the transfer to domestic prices of the volatility of international quotations and the exchange rate,” the government said in a statement.

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However, the decision makes analysts and economists fear a resumption of the policy of granting subsidies practiced during former president Dilma Rousseff’s government at the beginning of the last decade, when Petrobras accumulated tens of billions of reais in losses by artificially keeping fuel prices lower despite the increase in the price of oil in the global market.

According to Petrobras, the new commercial strategy uses market references such as “customers’ alternative costs” as a value to be prioritized in pricing, and the “marginal value for Petrobras”.

While the first criterion would consider “the main supply alternatives”, whether suppliers of the same product or substitutes, the marginal value for the company is based on “the opportunity cost, given the various alternatives for the company, including the production, import and export of refined products and/or the oils used in refining”.

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Brazilian President Luiz Inácio Lula da Silvadfd

The oil company maintains that the business strategy is based on competitive prices per sales target, “in balance with the domestic and international markets, taking into account the best alternative accessible to customers”.

“This strategy allows Petrobras to compete more efficiently, taking into account its market share, for the optimization of its refining assets, and [to achieve] profitability in a sustainable manner,” the government’s statement said.

“With this change, Petrobras has more flexibility to determine competitive prices, taking advantage of its better production and logistics conditions, and competing in the market with other players that sell fuels in Brazil, such as distributors and importers,” it added.

The company had already announced on Sunday that it would analyze the matter this week.

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An anticipated change

Since Lula’s victory in the second round of the elections last October, the market has been working with the expectation of a new commercial policy for fuels, since during the electoral campaign the now president adopted a stance defending measures to reduce the cost of living for Brazilians.

This year, the state-owned company has already made reductions in fuel prices, but the CEO of the company, Jean Paul Prates, had avoided publicly committing himself to a measure considered drastic to put an end to the parity of domestic prices with international market quotations.

Last Friday, Prates indicated that there would be news on trade policy this week during a press conference to comment on the first quarter balance sheet.

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“We are going to continue to follow the international reference and domestic competitiveness in each market. We are not going to lose sales, we are not going to stop having a more attractive price for our customers,” the CEO said.

The price of regular gasoline registered a 12.2% increase in Brazil in the first four months of the year, according to the Panorama Veloe de Indicadores de Movilidade Urbana, a survey conducted in partnership with the Fundação Instituto de Pesquisas Econômicas.

In April, the national average price of regular gasoline was 5.57 reais per liter ($1.12).

The survey showed that, in the first four months of the year, there was a 10.6% increase in the price of gasoline with additives, and a 4.8% increase in the price of hydrated ethanol.

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Nnatural gas for vehicles and diesel prices decreased in the first four months of the year, however

According to the survey, the S10 variety of diesel registered the largest drop (down 9.9%) from January to April, while normal diesel had an average price reduction of 8.9%, and natural gas for vehicles fell by 7.5%.

-- Sérgio Ripardo contributed to this story

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