Brazil revisits fuel price stabilization proposals

Brazil's federal government is studying an array of proposals to mitigate fuel price volatility.

State-owned energy research firm Epe is working with the mines and energy ministry to examine a proposed stabilization fund using windfall oil revenue, an official familiar with the studies tells Argus.

The ministry pointed to recent remarks by mines and minister Bento Albuquerque in favor of alternatives to less restrictive import-parity pricing used by state-controlled Petrobras, whose wholesale prices set a benchmark for the market.

A stabilization fund could be drawn from royalties that exceed oil price assumptions in state budgets, according to initial proposals. One drawback is ensuring the fund's solvency when oil prices go down.

The fund could also use a share of the federal government's revenues from production-sharing contracts, the oil, gas and biofuels secretary of the mines and energy ministry, Jose Mauro Coelho, has said.

Another option would be to modify the Cide fuels tax to allow the tax to be increased when international oil prices are low and decreased when oil prices increase.

The thrust of the proposals would be to preserve Petrobras' pricing independence while avoiding spikes at the pump, similar to stabilization and flexible tax mechanisms used in other countries such as Colombia, Chile and Mexico.

Similar proposals were floated after a 2018 truck drivers' strike that led to the departure of Petrobras chief executive Pedro Parente and the government's adoption of a temporary diesel price subsidy. The latest political flare-up over fuel pricing has forced the company's current chief executive Roberto Castello Branco to leave the company later this month. President Jair Bolsonaro nominated a former army general to take his place, with a mandate to rein in fuel prices.

Permanent tax break

While the studies are carried out, Bolsonaro's finance team is considering the short-term option of making permanent a two-month suspension of a federal tax on diesel and LPG.

Adopted on 1 March as a way to avoid another truckers' strike, the tax suspension is expected to reduce 2021 tax revenue by around R3.67bn ($645mn), according to government estimates. Federal law prohibits the government from cutting taxes without finding an alternative source of funding, which could prove challenging for the cash-strapped government.

Petrobras first adopted import-parity fuel pricing in October 2016 following years of heavy losses wrought by government-mandated price controls.

Investors fear a return to price intervention could derail the company's plan to sell refineries and other assets to curb debt and generate cash to invest in pre-salt oil development.