Did you notice that fuel prices have dropped subtly in recent months? Normally gasoline and diesel prices fall after Petrobras reductions at refineries, while ethanol prices fall according to the harvest period. But this time were not the only reasons: prices fell with a small import aid.
Although the idea of importing cheap prices may sound contradictory – after all the dollar is quoted at almost R $ 3.35 – the increase in the volume of imported fuels helped in this reduction of prices. Everything seems confusing so played in two paragraphs, but throughout this post you will understand how the pieces fit.
The deal starts with Petrobras’ current pricing policy, which gathers a commission every month to assess whether fuel prices at its refineries are expected to rise, fall or remain the same. For this they take into account variables such as freight cost, international oil barrel quotation and dollar quotation. If everything is favorable, the price goes down. In recent months prices have been dropping subtly (read well: subtly) to the point of reaching the lowest price since 2015, as we have seen here.
Petrobras’ pricing policy often has a significant impact on fuel prices because the state-owned oil company dominates practically the entire oil extraction and refining sector in Brazil. If you want to buy fuel produced here, you only have two options: the Petrobras refineries or the Manguinhos refinery, which is private.
It turns out that no distributor is forced to buy fuel in Brazil. They can simply import fuel.
This is where magic happens (although not magic): in defining its pricing policy, Petrobras is not imposing that all fuel traded in Brazil must follow its prices. She’s just saying how much the fuel will cost in her refineries. If you import the fuel for a lower price, you can sell it for a lower price. And that’s exactly what is happening: the volume of imports of gasoline and diesel has been increasing since 2015. Proof of this is that Petrobras refineries have been operating at only 77% of their capacity since the beginning of this year.
The fuel comes at a competitive enough price so that the distributors can improve their margins and still subtly reduce prices if necessary. “If necessary”, because as Petrobras sets its prices publicly, it also establishes a kind of “floor”.
And as expected in a minimally free market, faced with the competitiveness of imported gasoline and diesel, Petrobras was quick to act and announced further price reductions.
What about ethanol?
With ethanol there are some differences: even though it is the world’s largest producer of ethanol, imports increased more than 400% in the first three months of 2017. One reason was the sugarcane harvest, which reduced production, as in all years .
To make matters worse, Brazilian common gasoline must have 27.5% of anhydrous ethanol – no more, no less. By 2015 this percentage could range between 20% and 25%, and in the past decade the variation could be 18% to 25%. The variation of the percentage of the mixture was a way of adapting to the alcohol supply. When it became more expensive or scarce (off-season), it was enough to reduce the percentage. When it became cheaper or more abundant, the mixing percentage increased.
Without the variation, it is not possible to reduce the demand in the off season, and then the solution is to raise the price or get a way to get more ethanol.
But there is another problem: in the last two years the production of sugar has become advantageous with the reduction of sugar production in India. The mills reduced ethanol production to prioritize sugar, much more profitable, especially when its competitor is not very well.
The solution then was simply to import corn ethanol from the US, which also came to Brazil at fairly competitive prices – especially for not being taxed.
It is clear that the current situation will not always continue to be favorable: imports have only become advantageous because: (1) fuel is cheap abroad; 2) the dollar has remained stable in recent years. Without these conditions import becomes unfeasible and risky.
In addition, as imports compromise these market / industry sectors and imbalance the trade balance, the government is already studying new rules to contain imports (and protect local businesses), among them are the obligation of a minimum stock of ethanol at the end Of the annual crop and up to a rate of 17% on imported fuel – although the latter is less likely due to the risk of US retaliation.