Brazil's gasoline consumption growth may come to a halt if president-elect Luiz Inacio Lula da Silva overhauls decisions and laws adopted by his predecessor.
Brazilian gasoline consumption grew steadily at the expense of hydrous fuel ethanol in 2022. This was mostly because of taxation changes detrimental to the biofuel as policymakers lowered fuel taxes unevenly, an election year inflation-fighting technique used by President Jair Bolsonaro that largely proved unsuccessful.
In mid-June, the government granted a tax holiday from federal fuel taxes PIS/Cofins and Cide, which decreased E27 gasoline retail prices by an average of R0.69/l ($0.13/l). Around the same time, congress approved a cap on the state-level, VAT-like tax ICMS at 17-18pc for essential items, including gasoline. In Brazil, E27 gasoline and hydrous ethanol compete at retail stations to supply the country's flex-fuel car fleet.
The tax changes consolidated gasoline's momentum in Brazil's light-duty vehicle market, which has grown by an average of 10.2pc since 2021, reaching a 5-year high of 3.84 bn l (784,00 b/d) in August, according to oil regulator ANP. The steady increase placed gasoline at the forefront of fuel importers' strategy in the second half of 2022, effectively surpassing diesel import interest for the first time.
Lula's vocal campaign on environmental issues could lead his administration to reconsider his predecessor's tax changes, especially because inflation appears to be easing and state and federal finances remained strained following the Covid-19 crisis.
A reversal could also benefit Lula, as he attempts to regain the agricultural sector's trust amid ongoing talks about creating a single, unified carbon credit market as regulators question the relevance of Brazil's new motor fuels carbon credit program Renovabio, which only encompasses motor fuels.
The ghost of government intervention
Bolsonaro's attempts to intervene in Petrobras pricing were successfully rebuffed by the company's board throughout his term.
He reneged on his 2018 campaign promises of a free-market and privatization agenda once fuel prices started to climb following the start of the Ukraine conflict.
Market participants fear that Lula could be more determined and politically articulated to steer the Brazilian state-controlled company back to capping diesel and gasoline prices.
A consensus formed in congress earlier in December to revise the 2016 Lei das Estatais law aimed at protecting state-controlled companies like Petrobras against government influence and political appointees. Changes to the law could ease how politicians shuttle between public offices and state-controlled companies' boards by reducing the minimum delay between jobs from three years to 30 days. This could provide a backchannel for politicians to land strategic jobs in Brazil's national financial, energy and utilities companies.
Yet the bill is receiving backlash from the public and Brazilian businessmen as it rekindles practices unearthed during the Car Wash corruption investigation centered on Petrobras, initiated in 2014. On 16 December, Brazil Senator head Rodrigo Pacheco said it would be difficult for the bill to be approved before the end of the year. Critics of the bill will also follow the supreme court's upcoming decision, hoping it is challenged as swiftly as Lula's earlier declarations on prioritizing social programs over fiscal balance in November, which prompted an investor rout and led vice-president-elect Alckmin to stress the government's commitment to sound fiscal policy.
Market participants who invested heavily in the downstream sector in the past six years — such as 333,000 b/d Mataripe refinery's new owner Mubadala and Brazil's largest retailers Vibra, Raizen and Ipiranga — will closely track Lula's administration and Brazil's congress negotiations, hoping that whatever the outcome, the hard-won and fragile outcome of Brazil's divestment program since 2016 will endure.
