Gasoline at R$7 a liter: why fuel prices are rising – and who are ‘to blame’ for it | Economy

Brazilians are paying more and more to fill the car’s tank. In some cities in the country, the price of a liter of gasoline is already over R$7 – and it has become one of the villains of this year’s inflation, responsible for severely affecting the budget of Brazilian families.

In the accumulated result for this year until July, the price of gasoline has already advanced 27.51%, while that of diesel has accumulated an increase of 25.78%, according to the Broad National Consumer Price Index (IPCA).

At posts across the country, the climb is evident. Last week, a survey by the National Agency for Petroleum, Natural Gas and Biofuels (ANP) showed that the average price per liter of gasoline approached R$6. Diesel reached R$4.616 per liter.

The prices charged at the bombs became a reason for a clash between the president and the governors. Bolsonaro has publicly demanded that states reduce the Tax on Circulation of Goods and Services (ICMS) so that gasoline and diesel prices fall.

But, after all, why are fuel prices going up? And who are the ‘culprits’ for the high?

First, you need to understand how gasoline and diesel prices are set. The formation of fuel prices is composed of the price charged by Petrobras at the refineries, plus federal (PIS/Pasep, Cofins and Cide) and state (ICMS) taxes, in addition to the cost of distribution and resale.

There is also the cost of anhydrous ethanol in gasoline, and diesel has the impact of biodiesel. The variations of all these items is what determines how much fuel will cost at the pumps.

See below how much each item represented, on average, in the final price of fuel in the week of August 15th to 21st.

Price composition — Photo: Economy G1

The main ‘engine’ of the rises in gasoline and diesel has been the devalued real. Until this Wednesday (25th), the dollar – currency to which the value of oil is pegged – had accumulated an increase of 0.46% over the real this year. In March, however, this appreciation reached 11%.

“I would emphasize that the main culprit for the rise in fuel prices is the exchange rate, by far. Oil has already been at a value above the current one, and fuel did not cost what it costs today”, says Walter de Vitto, an analyst at the consultancy Tendencies.

Gasoline price: see the price escalation in Brazil

Gasoline price: see the price escalation in Brazil

But what makes the exchange rate go up?

What gives strength to this movement of loss in value of the Brazilian currency are the various uncertainties of investors regarding the direction of the government’s economic policy Jair Bolsonaro.

In recent days, the country has seen an intensification of the institutional crisis with threats made by the president to the elections and to other powers. Combined with Brazil’s weak fiscal framework, and doubts about the quality of the reforms that the Bolsonaro government can pass in Congress, these uncertainties drive the country’s dollars away – and prevent an appreciation of the real, which, at the end, could contribute to a drop in fuel prices.

“The fiscal issue needs to be tackled, now there is the political issue. These factors generate this uncertainty, and the exchange rate reflects all of this,” says de Vitto, from Tendências. “The demand for the real decreases, the demand for the dollar increases, and the Brazilian currency devalues.”

Oil price on the foreign market

There is also an additional pressure factor. The value of fuel is also influenced by the recovery in the price of oil on the international market. After the shock caused by the coronavirus pandemic, the global economy should have a robust growth this year, which increases the search for the commodity and, consequently, helps to push prices up.

“With this rise in the price (of oil) on the international market, the price of fuel is higher right from the start,” says Juliana Inhasz, professor and coordinator of graduation in economics at Insper.

Evolution of the price of a barrel of oil

Brent average value, in US$

Source: Consulting Trends

Petrobras Pricing Policy

During the Michel Temer government, Petrobras changed its fuel price policy to follow parity with the international market.

The fuel sales prices charged by the state-owned company started to follow the value of oil in the international market and the exchange rate variation. Thus, a higher price of the commodity and/or a devaluation of the real have the potential to contribute to an increase in prices in Brazil, for example.

Petrobras is dominant in the market. And, therefore, any change adopted by the state-owned company has the capacity to have an impact on the entire chain.

Understand how the political crisis affects the Brazilian economy

Understand how the political crisis affects the Brazilian economy

One of the main current accusations about high prices is related to the Tax on Circulation of Goods and Services – the ICMS. The state tax, in fact, weighs heavily on the value of the pump. The rate varies between states: in the case of gasoline, it reaches 30% in some places.

These rates, however, did not rise – but their calculation basis did. The tax is levied on an estimated average price paid by consumers; thus, if the price goes up at the pump, state governments can raise the estimate of the average price on which the ICMS is levied. That’s what happened in March of this year in most states.

From February until now, although the amount paid in ICMS has risen, the share of the tax in the total price of gasoline has fallen: that month, it represented 29% of the entire amount paid at the pump; in August, it was 27.5%, according to data from Petrobras. In the case of diesel, this share increased, from 14% to 15.9%.

Frictions and attempt to change calculation

In the discussion between Bolsonaro and governors about the weight of ICMS on fuel prices, representatives from 24 states and the Federal District met on Monday (23) and criticized the president’s attacks on state governments regarding the value of gasoline and diesel.

In 2020, the governors collected R$ 80.5 billion in ICMS from the sale of fuel, which represented 15.41% of the total tax gain for the year, according to a survey by the National Committee of State and District Finance Secretaries Federal (Comsefaz).

“The federal government is trying to place the blame on the backyard of the state governments. In practice, today, no one can give up revenue, much less ICMS”, says Juliana, from Insper. “State governments rely on these resources to try to be less in the red.”

  • Gasoline price: DF government says it will give up R$345 million to reduce ICMS on fuels

In February, Bolsonaro even sent a complementary bill to the National Congress that proposes changes in the calculation of ICMS on fuels.

The aim is to establish a “uniform and specific rate” – that is, a fixed and unified value across the country – for each fuel based on the unit of measurement. Today, each state adopts a different rate.

Is it possible to measure the impact of the exchange rate?

An exercise carried out by the consultancy Tendências makes it clear how the exchange rate has a central impact on the price of fuel.

The consultancy’s assessment is that the dollar would be at R$ 4.50 if there was no fiscal and political risk in Brazil. In this scenario, gasoline and diesel would have a 10% lower value.

In another scenario, if the dollar were at the same level as the beginning of the Bolsonaro government, the fall would be even greater, 20%. See the simulation:

The impact of the exchange rate on fuels — Photo: Economy G1

Why follow international parity?

In the Dilma Rousseff administration, to avoid an escalation of inflation, the government avoided readjusting administered prices, such as those for electricity and fuel. The measure was not well accepted by investors as it was considered a state intervention in the economy.

“The Dilma government used Petrobras as a way to absorb the impacts of prices, avoiding the transfer to the final consumer”, says Juliana, from Insper. “But the price increase has to happen because, otherwise, the government will bear this increase.”

During the Temer government, the change in prices became daily and ended up leading to a strike by the truckers. The demonstration cost the position of Pedro Parente, then president of Petrobras.

Pedro Parente resigns from the presidency of Petrobras — Photo: Rede Globo

Under the current administration, Petrobras still claims to maintain fuel price parity, but the readjustments happen at a lower frequency – the last one was announced on August 11th.

Bolsonaro has already publicly complained about the high prices and removed Roberto Castelo Branco from the command of the state-owned company earlier this year. He was replaced by General Joaquim Luna Silva.