By Lauro Valdir de Souza Economist and Retired Manager of PETROBRAS. ARPEL Regional Coordinator - Brazil

Undoubtedly the oil products prices policy in Brazil has been much discussed, especially after the truck drivers strike in May 2018. It is important to analyze what factors have led to the intensification of the view of truckers, refiners (PETROBRAS) and distributors.

This arose from a set of reasons that happened concomitantly:

1) The increasing in oil and fuel prices in the international market concentrated in a very short period;

2) Although the regulatory framework of the domestic oil products market segment has been open to competition since 2002 - imports, exports and prices - PETROBRAS from 2003 to 2014 did not have the autonomy to establish its oil products pricing policies. During this period prices were controlled by the Government. In 2009 alone, prices were practiced above the international prices, after the 2008 world economic crisis. In the period 2011-14, when high oil prices returned (reaching more than US $ 140.00/barrel), Brazilian oil products prices were practically frozen in that period. The tragedy of this practice is well known: no agent imported oil products because domestic prices were inferior to those of the exterior. On the other hand, PETROBRAS was forced to supply the market at a loss, either by maximizing oil processing at its refineries or by supplementing with imports of fuels;

3) Only from October 2016 onwards PETROBRAS has established its prices according to their fluctuation in the international market; see that it was in the management of President Pedro Parente (from May 2016) that a price policy trajectory was initiated that should have been initiated in 2002, when the market was opened due to the validity of Law 9478/97, which broke the state oil monopoly, until then executed only by PETROBRAS (refining, import and export of derivatives among other segments);

4) PETROBRAS' pricing policy, however, extrapolated to daily fluctuations in prices (without need according to experts) and levels above import parity. This practice generated unpredictability in the price quotations by the distributors, the service stations and the level of the truck drivers. Besides idleness of the production in the PETROBRAS refineries;

5) The truck drivers' strike decision was also influenced by lower transportation demand as a result of the low level of economic activity in Brazil, which continues in slow steps to emerge from an unprecedented economic recession in 2015-16.

The question that arises is how to prevent a new threat to the supply of oil products in the country, such as occurred in the truck drivers' strike in May 2018. The Temer Government requested support from the ANP to seek a solution, but nothing relevant was proposed. Is CADE (Administrative Council for Economic Defense) able, as has been mentioned in the media, to propose an alternative? I do not believe.

Some assumptions are essential to consolidate the oil price policy in Brazil:

1. If the regulatory framework chosen is a free competition market and the country is dependent on imports of fuels, it is not economical to establish a domestic price policy without considering prices and fluctuations in the international market; even by the size of the Brazilian oil products market (7th largest in the world) and volume of imports required; the alternative would be to create subsidies? A number of emerging countries are heading in the opposite direction, making efforts to end fuel subsidies (China, Indonesia, Malaysia, India) as a measure in line with the search for a more sustainable energy world (lower emissions);

2. The tax burden of fuels (gasoline and diesel) is very high, very close to developed European countries and when ex-refinery prices rise, taxes contribute to increasing the impact of prices at the consumer level and this is critical when there is a coincidence of factors, as in the past year. In this component of taxes it is possible to seek the use of a floating compensating tax, through an adaptation of CIDE-Fuels (Law 10.336 / 2001), so that "if prices rise above a certain percentage agreed in ex-refinery prices over a certain number of days (weeks or months)”, part of the increase could be covered by CIDE; on the other hand, when prices fall in percentages higher than the agreed band, part of the decrease in prices would go to CIDE and not to the consumer. Although the CIDE was set up to cover petroleum and alcohol derivatives as well as transport infrastructure, it would perform this lung function, which is widely practiced in other countries.

In conclusion, in fact the practice of free prices is something new in Brazil and it is natural that some adjustments of course have to be developed. Pedro Parente, in fact, was the villain of this story, although PETROBRAS in its period of management was mistaken in practicing daily price fluctuations.

If the society, through its representatives in the National Congress, decided that the free competition market is what should be adopted, then the regulatory entities have to create the mechanisms necessary for competition to benefit the consumers. However, we must not be fooled that companies which acting in the oil refining and marketing segments in any country, even if they do not exercise state monopolies, tend to act in a highly oligopolistic way.

Even in the USA this occurs. An example was in 2015-16, when oil prices fell to U$ 40.00/bbl, the refining margins went up a lot, that is, there were conditions to take part of the fall, not passing all benefit on to the consumer. As a result, Private Majors Downstream profits compensated the E&P losses (some have suffered losses such as Shell, for example).

Another example of an oligopolized performance in Brazil, which is occurring after the truck drivers strike, when petroleum product prices fell again, as a result of falling oil prices (it was almost US$ 80.00/bbl and dropped to US $ 55.00 / bbl). The three largest distributors (BR, RAÍZEN and IPIRANGA) are losing market share to the smaller ones (regional and so-called "white flag").

According to financial analysts, this market loss is because the three major distributors are incorporating part of the declines in ex-refinery prices at their margins. On the other hand, the small distributors are gaining Market-share, because they practice better prices next to the service stations, through import of fuels. Is this movement hurting consumers? If the quality of imported products is equivalent to that of the three major distributors, consumers are benefiting. In addition, small distributors are strengthening, which is healthy for the competitive market.

The practice of pricing policy in Brazil in line with international prices is also a basic assumption for the competitiveness of the biofuels segment, which in 2011-14 suffered bad times with the closing of hundreds of ethanol plants, in the face of the price freeze of gasoline and diesel. Even if the ethanol business model is linked to the sugar commodity, where Brazil is the world's largest exporter.

Although PETROBRAS holds a dominant position as the country's unique refiner, in addition to enormous competitive advantages because it produces oil and has logistics close to the main points of the market, it does not have the power of the market. That is, if its prices exceed import parity - as in 2018 - it loses Market-share and the refineries are idle because their customers (distributors) are looking for the import alternative. In short, PETROBRAS has to play the game on an equal conditions with its competitors. It is not recommended PETROBRAS play another role, which is not in line with the competitive market and with the guidelines and rules of the regulatory entities.

In conclusion, recent experience has been very rich, we hope that this path will be consolidated, as the points that need adjustments already have all mapped out and decision-making does not require a deep regulatory review.