Brazil's Petrobras is probably the only oil company in the world facing such a predicament: the more gasoline it sells, the more it pisses off investors.
That's because the limitations Petrobras faces by the federal government regarding fuel price increases have been exposed like never before this year. The company has missed out on an estimated BRL6.1 billion in profit so far this year for failing to charge what the global market would dictate, with pricing off by 28% for Brazilian diesel, and 26.5% for gasoline, according to figures released in early June by the Brazilian Centre for Infrastructure (CBIE).
Petrobras has had to import fuels to serve domestic demand at a record pace within the last year, often realizing immediate losses because of restrictions on their end-price in Brazil. Fuel consumption in Brazil grew more than twice the rate of GDP in 2011, and billions in losses are expected this year if Petrobras isn't provided some pricing flexibility.
It's pitiful to witness how the Brazilian government is utilizing a great asset like Petrobras as a massive plug to hold back the inflationary pressure of its entire economy. You can argue that nearly all of the cane industry's investment struggles of this year and last have been ripple effects of the government's long-term stranglehold on fuel prices.
But that gas price glass ceiling has suffered more cracks to its integrity this year than ever before, and Brazilian ethanol may soon have on its side the only company big enough to shatter it – Petrobras itself.
Investors in Brazil and abroad have made their displeasure with Petrobras known this year. Now the world's fifth largest oil company, Petrobras lost more value on its public shares than any of its global peers in the first five months of this year.
Since April, share prices have fallen 26% in US dollar value, more than share losses at Exxon, BP and PetroChina. Petrobras officials say they've been told by major investment banks that they're avoiding the Brazilian oil company and investing in other global energy firms that are more free to pass on cost increases to consumers.
Two main factors accelerated the problem: Brazil's steady car sales growth in recent years, and last year's ethanol crisis. As ethanol prices soared in 2011, consumers favored gasoline and drove Petrobras to import more than it planned. Gasoline imports to Brazil increased by 400% in 2011 compared to the year prior, or 45,000 barrels per day against 9,000 in 2010.
We've seen within the last month or so a tidal shift in how this issue is being addressed by Petrobras officials. Those in the company's highest ranks are speaking more candidly about this problem, in some instances calling out the government's fuel price manipulation as “no longer necessary,” a diplomatic phrasing for sure.
With oil futures trading as low as US$81 a barrel this week on the NYME, oil is in a bear market after falling more than 20% since May 1. There's currently a window of opportunity for Petrobras to be allowed to increase its pricing by just a few dollars and not shock the Brazilian market, bringing it in line with global pricing that has reduced in recent weeks.
But both the CEO of Royal Dutch Shell and the International Energy Agency said this week its wrong to think oil's price won't rebound above US$100, because despite the struggling economies of today, long-term fundamentals of oil supply and its inability to meet rising demand haven't changed.
Brazil's a country rich in natural energy resources, but it's economy now struggles under the burden of some of the world's highest energy prices.
Public policy toward energy development and management has for decades discouraged competition and protected methods for monopolistic practice, content to let oil, gas and electric companies serve as some of the biggest tax collectors for the federal government.
It's quite possible that Brazil's ethanol sector never realizes its full potential if the nation's gas price manipulation is allowed to continue. The gas ceiling has placed cane millers' margins under enough pressure to deter most investors.
It's a reminder not to take our eyes off Brazil, where an epic showdown could finally take place this year between Petrobras and the federal government, with a hobbled cane ethanol sector set to reap the benefits of change.