Gasoline price: what Europe and Brazil are doing – 06/18/2022 – Vinicius Torres Freire

The French government has set the price of gas, which is essential for heating homes in winter, and has capped an electricity tariff readjustment of 35% to 4%. It was in September 2021, when the world energy crisis began, worsened by the Ukrainian War. It didn’t stop there.

Some of these measures are expected to cause a loss of 8 billion euros (R$ 43 billion) for EDF, the French energy giant. The government owns 84% ​​of the company’s shares. Remember a Petrobras?

EDF workers’ unions went to court, without success, against the government’s measures, including the obligation for EDF to sell even more energy below cost to competitors (this was a measure to mitigate the company’s market power; now, it is price control).

Trade unionists say the government will “ruin EDF”. They fear that the even greater indebtedness of EDF will lead to the dismantling and privatization of the company in the basin of souls. They are ironies within ironies.

The EDF president called on the government to back off. EDF is a public company “at the service of the general interest”, said Bruno Le Maire, Minister of Economy, Finance and Industrial and Digital Sovereignty (sic) in a government seen as liberalizing. Still, Le Maire wants to recapitalize (put money) into the company to lessen the financial damage.

How to limit the increase in energy prices?

Many measures can limit the price increase, here or in Europe. The question is who pays the bill and what the economic or other consequences are. For the most part, the amendments are worse than the sonnet.

In this crisis, European governments reduced taxes on fuel and electricity, fixed prices, gave money so that their citizens could pay their energy bills, made public transport cheaper, increased the value of minimum rents and other social benefits or paid for part of the price of fuels.

On this, Germany, France, Italy and Spain have so far spent between 1.2% of GDP and 2.3% of GDP. In Brazil, there are estimates that reducing energy taxes will cost less than 1% of GDP (R$ 90 billion) for government revenue (federal and state), but it is still too early to do the math.

Energy inflation causes political tension around the world. The upheaval seen in Brazil at the end of last week was only more gross, ignorant and demagogic.

Not all European Union countries have gone as far as France, which has an interventionist tradition and, until April, had a president fighting for a difficult re-election.

Emmanuel Macron was already scalded by the 2018-19 “Yellow Vests” protests (set off by increased taxes on fossil fuels). The campaign topic was inflation, and that will be a big topic here and in the late 2022 US legislative election, which could turn Joe Biden into a precocious lame duck.

Spending by European countries on direct and indirect subsidies can increase to 2% of GDP on average, and even more if the account includes expenditure to decrease dependence on Russian gas and oil. The European plan to alleviate the great financial crisis that began in 2008 recommended a fiscal stimulus (public spending) of 1.5% of GDP. The information is from the European think tank Bruegel.

Bruegel and four European think thanks associates say that energy crisis expenditures now range from 0.1% to 3.6% of GDP in each country, as are measures to alleviate the energy crisis.

Only 6 European Union countries created taxes on extraordinary profits of energy companies, 4 set state prices and 2 intervened in wholesale prices —Spain and Portugal set gas prices. Some, like Germany and Italy, have larger energy sector reform plans.

The “think tanks”, the OECD and the bulk of economists recommend that measures against the crisis should focus on cash transfers to those most affected by the famine and never bully prices.

Limiting prices encourages consumption of scarce and, in this case, polluting goods; discourages investments in increasing capacity and energy alternatives. Furthermore, the general tax or subsidy is iniquitous, as it is indiscriminate: it also benefits the rich in a world of increased shortages.

In the medium term, finally, the measures in general would be unsustainable because they increase government debt.

And Brazil with that?

For starters, what should be a debate is a barrage of blunders and atrocious lies. The president of the Chamber and powerful center of Jair Bolsonaro, Arthur Lira (PP-AL) tweeted on Friday that the price of Petrobras shares was melting because the company increased its prices.

To continue, get some sense of the values ​​involved in this conversation. Brazil consumes 64.5 billion liters of diesel per year and 41.4 billion liters of gasoline. Lowering the price of a liter of these fuels by R$ 1, therefore, costs about R$ 106 billion per year. It was the (exceptional and transitory) profit last year for Petrobras, which has about 80% of the market for these two fuels in the country.

Who would pay the bill for this mere reduction of R$ 1? It could be Petrobras. The company would run out of money to invest (increase production) and would lose credit. The meltdown of the company’s stock is just that: loss of credit (with a rise in its cost of financing).

If Petrobras doesn’t invest in more production, the government can put money into Petrobras. It would take on more debt, at the cost of at least 13.25% interest per year. There would be better use of resources, even more so now, when poverty has reached its highest level in 15 years and there is no money for investment in works, expansion of the SUS or science. By the way, the French government pays 2.2% and the German government pays 1.7% a year for 10-year loans.

Brazil produces only about 70% of the diesel and gasoline it consumes. With a price listed below the world value, there will be no imports. Will miss.

A tax on the “extraordinary” profits distributed by Petrobras (dividends) could, however, pay for a few cents from the price reduction (albeit with harmful consequences, as the French trade unionists at EDF know).

On Friday, MIT professor Olivier Blanchard, a cardinal among economists and “orthodox” with a dash of French thyme, tweeted outright that the windfall tax “is not wrong.”

If profit disappears and companies get into trouble, should the government pay for the loss? Wouldn’t companies in other sectors have extraordinary profits (Big Tech? Big Pharma? Big Finance?)? The inflation of many foods was much higher than that of fuels (see graph) and even that of industrial goods increased in Brazil. Is it necessary to subsidize food? Taxing companies in the sector, à la Argentina?

We need to subsidize the poor. Suppose the government paid for that R$1 reduction in diesel and gasoline: R$106 billion per year. Auxílio Brasil alleviates the hunger of some 50 million people with R$ 89 billion a year.

About Abhishek Pratap

Food maven. Unapologetic travel fanatic. MCU's fan. Infuriatingly humble creator. Award-winning pop culture ninja.

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