In late February, a cellphone video went viral in Brazil. In it, a well-dressed blonde screams at the top of her lungs at customers in a gas station: “Don’t fill your tanks! We can’t accept this price hike! The more gas in the stations, the more the price will go down!”
The woman, identified as Taís Helena Galon Borges, 36, manager of a healthcare software company, goes on for over a minute. “Stay home, take the bus, but don’t fill up! Let them have more gasoline in their stocks! It’s the law of supply and demand! If there’s more product available, the price will go down!”
Video source: http://pioneiro.clicrbs.com.br/rs/noticia/2015/02/mulher-invade-posto-e-apela-a-motoristas-para-que-deixem-de-abastecer-veiculos-em-caxias-do-sul-4707746.html
But as much as she uselessly protests, gas prices in Brazil are not benefiting from the laws of the market, and most certainly will not go down in the coming months, despite the global plunge in oil prices.
In fact, they rose twice in the last five months; climbing almost 10%, to $4.50 a gallon, while in the US the national average is currently at $2.43 a gallon.
Brazil shows how the fall in oil prices affects different countries, depending on the overall state of their economies, the currency market and political turmoil.
In the short term, fiscal policies, the strengthening dollar and corruption scandals are almost canceling out the benefits of the oil price plunge for oil-importing Brazil. In the long run, the prospects are not so great, either.
“The price plunge started out definitely helping our trade balance as well as Petrobras, at least until the dollar went up,” explains Adriano Pires, founder and director of the energy consultancy CBIE. “In the long haul, it should hurt our investments in deep-sea drilling.”
Petrobras is a state-owned company that had a monopoly on oil production, distribution and refinery in Brazil until the late 1990s, and it remains the main player in the Brazilian market. When Petrobras raises its gas and diesel prices, everybody else follows.
Fuel is also a significant factor in Brazil’s inflation, since the country is very dependent on truck freight.
The Brazilian government, still Petrobras’s main shareholder, has used the company’s hold on the fuel market as a tool of fiscal policy. For the last five years, it has subsidized gas and diesel prices at the pump in an effort to keep inflation in check.
By buying high and selling low, the company took a serious financial hit. “Petrobras bled a lot in this period,” says Ricardo Hatschbach, vice president for energy and transportation for South America at Dutch bank ABN Amro. From 2011 to late 2014, the company lost $18 billion in revenues, according to CBIE.
Add to that a $220-billion investment plan to explore new deep-water (also called pre-salt) oil fields discovered in 2007. Petrobras made that plan when oil was still at $100 a barrel. The company’s present debt is $102 billion, according to CBIE.
To make matters worse, a year ago some of Petrobras’s top executives and 23 construction companies were accused of overcharging on contracts and splitting the profits with the executives and well-known politicians. The scheme, nicknamed Operation Carwash by the Brazilian federal police took around $650 million from the company. So far, 86 people have been criminally charged.
In this scenario, the oil price plunge was a welcome, if short-lived, relief for Petrobras. The Brazilian government did its part by raising the national gas and diesel prices 3% in November and fuel taxes in February, which caused a second increase of 7.5%.
Those increases brought revenue to the government and helped widen Petrobras’ margins. “In January, Brazilian gasoline was 64% more expensive than the international market,” Pires says. “That helped Petrobras not to lose so much.”
But a strong dollar surge in February, allied to the political and economical instability in Brazil, ended the relief. “With the dollar at this rate, the gains and losses even out,” Pires said. “But the diesel still is still 11% more expensive than in the international markets, which helps.”
If the short-term gains are offset by the currency exchange rate, the long-run prospects are also troubling. A World Bank report released in January calls the low oil prices a “window of opportunity” for oil-importing countries like China, India and Brazil to boost their financial reserves as long as they make much-needed fiscal and structural reforms.
But the report also points out that new exploration projects like the pre-salt fields may be at risk because they are not profitable at the current prices, despite Petrobras’s claims to the contrary.
In gas stations all over Brazil, all this talk seems detached from reality. “I don’t drive over the speed limit,” says Melissa Rossatti, a psychologist from Caieiras, a small town near São Paulo. “I don’t use the car’s air conditioner anymore, I walk to places I wouldn’t before.”
A few months ago, she wouldn’t have thought twice about driving 23 miles to São Paulo every day to run errands or meet friends.
Now, she tends to group everything she needs to do in the city into the two days a week she works there, and she drives there slowly with her windows open. With this measures, she claims to have cut gas expenses by half, filling the tank only once a week in São Paulo, where prices are lower than in her hometown.
She has a faint understanding about why the prices had to go up in the last few months. “I have a friend who works in Petrobras and explained that they had to do it — that the government was holding up the price and it was outdated,” she said by phone. “But it doesn’t feel to me that gasoline was ever cheap, was it?”