Is the oil really ours?

In addition to death and taxes, in Brazil it is also certain that controversies over the price of oil products will arise from time to time. It is happening again, following successive rounds of price increases by Petrobras aimed at adjusting for commodity prices and the exchange rate. Truck drivers - always very vocal, and high-profile supporters of President Jair Bolsonaro - threatened to go on strike, as they did 3 years ago over the same cause. The replacement of Petrobras’s CEO, which the federal government claims was unconnected with the price controversy, and the decision to zero federal taxes on diesel and LPG soon followed.

The price for oil products has been the source of frequent heated debates and conflicting views since an amendment to Brazil’s federal Constitution and the enactment of the Oil Act of 1997 ended Petrobras’s legal monopoly over the various segments of Brazil’s oil industry. Prior to that, sensitive decisions concerning prices were taken by authorities in Brasília and would consider the effects on inflation – and, less ostensibly, on pollster ratings. When prices were fixed below international parity, Petrobras would credit itself against the Treasury under an arrangement known as the oil account, which was eventually settled in 2002, as required by the 1997 Oil Act.

The 1997 Oil Act was meant to increase competition in the Brazilian oil market by ending government control over oil prices and increasing the number players in the downstream markets. This, however, never occurred; to this day Petrobras holds 99% of total refining capacity. Imports of oil products have been limited to a negligible share of total demand, with independent importers complaining from time to time of predatory pricing by Petrobras. (The company has so far successfully fended off such accusations).

This is bound to change if the agreement entered in June 2019 between Petrobras and CADE - discussed by Isabella Tanuy Gonçalves in another article in this LS Brazil Outlook - is implemented. With this agreement, Petrobras settled an overarching, open-ended investigation that was in its very initial stages by committing to sell 8 of its 13 refineries. It was a particularly bold deal, as this is hardly the expected course of action in similar circumstances: the prosecution of anticompetitive behavior (such as abuse of dominance) hardly ever results in structural remedies such as the sale of meaningful assets.

In all likelihood, Petrobras’s decision reflected its desire to have an official seal of approval for an initiative that it planned to pursue anyway. At CADE, approval of the settlement was hailed as a landmark decision – understandably so. As discussed by guest author Winston Fritsch, this much awaited, long overdue scenario featuring a plurality of agents in the refining market is bound to result in vigorous competitive dynamics in this very sensitive and relevant industry.

The current polemics around the price for oil products has again led to discussions of mechanisms aimed at attenuating price volatility. President Bolsonaro has pointed to state taxes as the chief villain of high prices; and the federal administration has just announced the zeroing of federal taxes on diesel oil and LPG. However, any permanent tax cuts – state or federal – can hardly be expected, as the fiscal imbalance of the public sector is the single most concerning problem of the Brazilian economy.

Solutions discussed in the press include a price-stabilization mechanism fed with resources from royalties, and the adoption of a fuel surplus mechanism along the lines of that adopted in the U.S. and in some other countries. However, devising, discussing and implementing any such mechanism would be a major challenge; more so under a competitive environment, where other players own refineries alongside Petrobras.

Over the 25 years since the oil account was terminated, government meddling with prices took place de facto, along with creative - and hardly convincing - justifications by Petrobras’s top management. Abundant litigation and administrative proceedings were set in motion by minority shareholders complaining about such interference and claiming damages for the losses it allegedly caused. In 2016, following the emergence of the carwash corruption scandal (centered around Petrobras), legislation designed to protect state-owned companies from undue interference by the controlling shareholder (the federal administration) was enacted; in 2018, Petrobras by-laws were altered with the same objective.

The commonly held and certainly sound view is that domestic prices should be left to fluctuate freely, in line with international prices. This author was an official with the federal government at the time the 1997 Oil Act was enacted and participated actively in the deregulation of this industry in Brazil; and has assisted clients in this industry since. This experience leads him to believe that Brazil’s federal administration is likely to seek an arrangement designed, at the very least, at ensuring some predictability. In Brazil, o petróleo é nosso (oil is ours), a phrase coined at the time Petrobras was created (in 1953) is as often repeated as Deus é brasileiro, or God is Brazilian (and is equally non-sensical). The implications of this view are intuitive. It would be a most welcome result if, this time over, lasting progress were made on the basis of solid analysis, legal and otherwise. The National Council for Energy Policy, created by the 1987 Oil Act, should play an active role in this regard.

Image: Skitterphoto / Pixabay

L&S Authors

Bolívar Moura Rocha

Bolívar Moura Rocha


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