Petrobras’ diesel price freeze draws criticism

Henry Lummertz
BNamericas
24/05/2018

After Brazil’s truck drivers called a massive strike against rising diesel prices, the government cut taxes to bring prices down. Yet the strike continued, which now led state-run Petrobras to freeze diesel prices.
This move, however, is palliative and will not solve the country’s fuel price problems, Henry Lummertz, partner of Souto Correa Advogados law firm specialized in taxes, told BNamericas.
“The price rise was not caused by internal questions; it is a reflection of international instability. Petrobras needs to practice international pricing; this is a normal economic mechanism. The solution is the government to correct distortions regarding the tax burden, which is too heavy in this segment, and distribute levies better among other economic segments,” the lawyer said.
Petrobras announced on Wednesday it would decrease the average diesel price from its refineries by 10% for the next 15 days, with prices remaining unchanged at around 2.10 reais (US$0.58) per liter. Recently, the government eliminated a tax called Cide and lawmakers started discussing a possible cut on Cofins and PIS social security levies, all of which have contributed to high fuel prices.
Discussions began after truck drivers started a national mobilization against rising fuel prices, which caused a shortage of supplies for the population. Prices rose after Petrobras adopted pricing in line with rates set by international markets in 2016, abandoning subsidized prices which damaged the company’s cash flow.
The market did not respond well to the current freeze. Petrobras CEO Pedro Parente had to alleviate analysts’ concerns over political interference in a conference call.
“This was not a decision taken out of political interference; it was made by our executives independently of any other institution. We will not do it again, it was an exceptional measure to address an exceptional situation,” the CEO said.
Parente confirmed the discount will reduce the company’s revenue by 350mn reais, but he guaranteed the firm will gradually resume its pricing policy after the 15-day freeze.
Meanwhile, the government continues to mull cutting taxes on other fuels. According to energy ministry data, levies make up 44% of the final gas price.
“We are proposing a national effort to reduce taxes on the energy chain. Our proposals aim to reduce taxes in strategic areas and to correct unfair exemptions that have given privileges to some sectors to the detriment of others,” energy minister Wellington Moreira Franco said Thursday in an op-ed for newspaper O Globo.
But prices cannot fall without the involvement of state governments.
“Federal levies will not eliminate the tax burden and it is known that one of heaviest tax is the ICMS, charged on a state level,” lawyer Henry Lummertz said.