Why fuel prices go up so much and how much can they stop

In one year, fuel prices rose more than 30%.

In one year, fuel prices rose more than 30%.| Photo: Fernando Frazão/Agência Brasil

Fuel pressure on inflation shows no signs of letting up. A survey carried out by the National Petroleum Agency (ANP) shows that, in the last ten weeks, the liter of gasoline increased by 5.1% at service stations. Diesel oil had an increase of 2.4%. And the price of a 13 kg cylinder of cooking gas was 5.3% more expensive.

In at least three states – Acre, Rio de Janeiro and Rio Grande do Sul – it is already possible to find stations charging more than R$ 7 per liter of gasoline. The lowest average price is found in São Paulo (R$5.653) and the highest in Rio de Janeiro (R$6.513).

A number of factors explain the rise in fuel prices: oil prices at high levels abroad; the devaluation of the real (3.62% in the period, according to the Central Bank), which also influences local costs; the resumption of economic activity; and problems with the sugarcane crop.

These are the latest numbers. But the price increase movement started much longer ago. Over the course of a year, all major fuels rose by more than 30%, the national average.

According to the IBGE’s IPCA-15 measurement, gasoline became 40% more expensive in 12 months. Ethanol soared 53%. Diesel, 36%. And the prices of natural gas for vehicles (CNG) and bottled gas rose 31%.

Oil price remains under pressure on the international market

The price of a barrel of oil is around US$ 70, double the price in October 2020. “The Organization of Petroleum Exporting Countries (OPEC) established restrictions on production at the beginning of the pandemic”, explains analyst Guilherme Sousa, of Active Investments.

He points out that it is difficult to establish a deadline for prices to stay at more behaved levels. “We expected a normalization in the second half”, he says. According to him, part of the volatility in fuel prices was controlled with the spacing in price adjustments by Petrobras.

Even so, Sousa points out that the price of a liter of gasoline is outdated in relation to the international market. According to him, the lag would reach 15% – and this would be the increase in refineries if Petrobras decided to match prices to the external reality at once.

The head of economic analysis at Swiss bank Julius Baer, ​​Norbert Rücker, points out that, throughout the pandemic, oil demand recovered more quickly than supply. “This causes inventories to decrease, the market contracts and the price of oil tends to increase.”

This scenario should persist in the coming months. The analyst also recalls that there is the usual up-and-down of the market, when concerns about the pandemic setbacks put pressure on prices.

However, Rücker notes a slowdown in oil demand growth rates: “The rapid expansion is over and it is returning to a normal pace.” Thus, he projects that in the next 12 months there are more possibilities for a reduction than for an increase in the price of a barrel.

“As oil nations ease their supply constraints and there are gradual increases in shale production, supply adjusts to demand. As a result, stocks stop decreasing and, in exchange, they eventually expand, which finally leaves a more favorable situation”, he says.

Problems with the sugarcane crop affect gasoline prices

Another factor that contributes to keeping gasoline prices higher, according to Sousa, is anhydrous ethanol, which has a 27% share in the composition of gasoline.

Since the second half of July, prices have increased 10.6%, according to the Center for Advanced Studies in Economics at the University of São Paulo (Cepea-USP). The reason is the mismatch between the low supply and the high demand, stimulated by the return of classroom classes.

The increase is not limited to anhydrous alcohol, which is mixed with gasoline and therefore influences the price of the petroleum product. Hydrated alcohol has also become much more expensive – it is the fuel that has increased the most in the last 12 months, according to the IBGE.

According to Cepea, there is concern about the impacts caused by the cold wave in July. The first and second frosts in winter affected an area of ​​around 1 million hectares, or 26.9% of the crop that will be harvested by the end of this agricultural cycle, points out the Sugarcane Industry Association (Unica). The harvest should be completed in about a month.

The organisation’s technical director, Antonio de Padua Rodrigues, explains that the sharpest drop in productivity in July and August was already expected, because during this period a lot of sugarcane was harvested, damaged by frost. “The weather phenomenon required a significant change in the harvest dynamics, further harming the yield of the harvested crop,” he says.

The impacts of the cold could be felt in the next agricultural cycle. According to the executive, the sugarcane supply expected for the 2021/22 crop in the Center-South region should reach 530 million tons, “with a downward bias, in view of the still uncertain impact of the third frost and the outbreaks of fire that have been observed in recent days”.

Fuel prices also reflect increased vehicle flow

Rücker points out that oil demand has largely recovered to pre-crisis levels. “China’s oil demand has stabilized at high levels, fuel use on US highways seasonally exceeds historic highs, air traffic is recovering quickly, and only international flight routes take longer to re-establish,” he wrote in a report “The pandemic setbacks bring some restrictions in Asia, which are minor and only slightly reduce demand.”

With the recovery of the economy, the demand for fuels is also on the rise in Brazil. According to the Brazilian Association of Highway Concessionaires (ABCR), in the 12 months ended in July, the flow on toll roads grew 4.1% compared to the previous period. The movement of heavy vehicles increased 8.2%.

In the first half, diesel sales by distributors grew 11.1% compared to the same period in 2020. Gasoline sales, according to the ANP, increased 8.1%.