Petrobras fuel price hikes accent distortion

OREANDA-NEWS. October 02, 2015. Brazil's state-controlled Petrobras unexpectedly increased wholesale gasoline and diesel prices in the domestic market, potentially widening a controversial premium to international prices.

The heavily indebted company said last night that the gasoline price would increase by 6pc, and diesel by 4pc, starting today.

The price hikes are the first since increases of 3pc for gasoline and 5pc for diesel imposed in November 2014.

Between 2010 and 2014, Petrobras was forced by the federal government to sell fuel at below international prices, resulting in an estimated R80bn (\\$19.9bn) in losses for the company.

The price controls were intended to curb inflation, which is now hovering at more than 9.5pc for the past 12 months.

But the sharp decline in oil prices since mid-2014 has introduced a reverse distortion. For much of this year, Petrobras has been selling diesel on the domestic market at above international prices.

Although the margins on gasoline have fluctuated over this period, as of last week, Petrobras was already selling gasoline at an estimated 12pc premium to the price abroad.

Critics have long called on the government to institute a predictable fuel pricing model that reflects global market trends.

The new price increases are certain to spark a backlash from consumer and industrial groups.

A main beneficiary of the gasoline price increase is Brazil?s struggling ethanol industry.

With the higher price, mills will be able to raise the price of hydrous ethanol, which competes directly with gasoline at the pump.

Petrobras also raised LPG and natural gas prices in the domestic market earlier this month.