Brazil’s economy ground to a halt over the past week as truckers staged nationwide protests, blocking roads in protest of high diesel prices and preventing the shipment of nearly everything, including food, fuel, and other indispensable supplies.
Lowering fuel prices raises questions about the negative impact to state-owned oil company Petrobras.
The Brazilian government hoped to quickly end the standoff, but after unsuccessfully trying to break up the road blockages, it agreed to lower diesel prices. Still, the protests continue despite the pricing concession. Lowering fuel prices raises questions about the negative impact to state-owned oil company Petrobras. Meanwhile, since the protests are not only focused on diesel prices, but inspired by a broader anxiety about the economy and corruption from the government, they could spread. Oil workers began a three-day strike on Wednesday. At the time of this writing, it seems unlikely that oil production will be immediately impacted, even as previous worker stoppages have interrupted oil flows. Even so, the outcome has ramifications beyond Brazil, as it is expected to be one of the largest sources of non-OPEC supply growth over the next few years.
Strikes cripple the country
The trucker protests and roadblocks have led to fuel shortages across the country. Flights were cancelled and grocery stores are reportedly having trouble stocking shelves. After failing to clear the roadblocks using the military, President Michel Temer promised to lower diesel prices, a major concession intended to end the standoff.
The cost of fuel has jumped in recent months as crude oil prices have posted strong gains and the Brazilian currency, the real, has plunged by approximately 20 percent since January. A weaker real makes crude oil, which is priced in dollars, more expensive. The compounding effects on the price of fuel have sparked anger at a time when the Brazilian population is already irate with a corrupt government and austerity measures, with the economy only recently emerging from the worst recession in the country’s modern history.
Even as President Temer tried to resolve the truckers’ strike, the risk is that the protests spread to other sectors. Workers at oil giant Petrobras have promised to strike, forcing management to issue a statement urging against such an action. “How can Petrobras and its workers better help Brazil at this moment? We do not believe that paralysis and pressure for adjusting prices is the answer,” the company said on Monday.
The strike began on Wednesday, with workers reportedly not showing up at eight refineries spread across the country. Reuters reports that workers “also walked off the job at plants handling lubricants, nitrogen and shale gas, as well as in the ports of Suape and Paranaguá.” Petrobras sought a court ruling on Tuesday that would make the protests illegal on the basis that the strikes are not labor-related but politically motivated.
The strikes and the unrest are occurring against the backdrop of upcoming presidential election later this year.
The strikes and the unrest are occurring against the backdrop of upcoming presidential election later this year, a vote that offers Brazilians radically different choices. The top candidate is the far-right Jair Bolsonaro, who has openly expressed sympathy for a return to military dictatorship. A number of centrist and leftists candidates are challenging him. Because of the explosion of anger at the highly unpopular government, many of the top presidential candidates across the political spectrum are positioning themselves as defenders of the protestors, backing the government into a corner. Ultimately, there is a great deal of pressure to lower fuel prices, although it is unclear if that will be enough to control the unrest.
Damage to Petrobras
The share price of Petrobras plunged by 15 percent immediately following the announcement that the government would lower domestic diesel prices by 0.46 real per liter, or about 13 percent. To be sure, the deal is tentatively only supposed to last 60 days, and the government has promised to reimburse Petrobras for having to lower fuel prices. Nevertheless, Petrobras has lost about 31 percent of its value on the New York Stock Exchange since mid-May.
Petrobras has lost about 31 percent of its value on the New York Stock Exchange since mid-May.
The latest pricing announcement “suggests increasing risk that the government will interfere in Petrobras affairs again or force them to subsidize the domestic market again,” Morningstar analyst Allen Good told Reuters, while adding that the latest move was “a change in the market-friendly policy implemented in the last couple of years.”
“Petrobras announces that the company will not subsidize the price of diesel and will not incur any losses, since it will be reimbursed by the federal government in a way that has yet to be defined,” Petrobras wrote in a filing with stock regulators on Monday, according to S&P Global Platts. However, unions representing oil workers are demanding an end to market-based fuel pricing that was introduced a few years ago. Reuters reported on Tuesday that President Temer is considering such a move under intense pressure.
The irony is that Petrobras recently reported its highest quarterly profit in five years. In the past, the oil company had been hurt by high spending levels and regulated fuel prices. Those factors led it to becoming the most indebted oil company in the world. That trajectory became untenable, especially after the Lava Jato corruption investigation. In the past few years, the company has sold off billions of dollars’ worth of assets, lowered its ambitions, and paid down a portion of its debt. The legislative opening of the oil sector, which has allowed international companies to lead on pre-salt oil projects, has also reduced pressure on Petrobras.
The IEA projects that after the U.S., Brazil will provide the largest source of non-OPEC production growth over the next five years.
With major investment from the oil majors, including Royal Dutch Shell, ExxonMobil and Chevron, Brazil has been hailed as one of the most attractive places in the world for offshore development. Recent auctions have been a success, raising around $2.7 billion in signing bonuses and potentially leading to high levels of investment. The IEA projects that after the U.S., Brazil will provide the largest source of non-OPEC production growth over the next five years, adding about 1 million barrels per day (Mbd) through 2023.
The IEA made a similar prediction more than a year ago, but since then the results have been a disappointment. Last year, the IEA projected that Brazil would produce 2.84 Mbd in 2017 and 3.05 Mbd in 2018, but those figures were revised downward earlier this year to 2.74 Mbd for 2017 and 2.89 Mbd for 2018. The lower-than-expected production figures have contributed to a tighter global oil market, granting OPEC more leverage as it considers its next steps. Still, even as Brazil undershoots expectations, the IEA has maintained its medium-term forecast, noting that a variety of pre-salt projects are set to come online in the next few years.
While there are reasons for optimism over the next few years, Petrobras and Brazil are facing a more immediate crisis. The three-day protest by oil workers beginning on May 30 heightens pressure on the government to roll back pricing reforms. The public outcry and the economic fallout has become so great that President Temer has had to beat back questions about the possibility of a military coup. The work stoppage has been described as a “warning strike.” These events do not typically affect oil or refining production, according to S&P Global Platts, but come immediately after the truckers’ strike, which had curtailed some refinery production.
Higher fuel prices and oil production will remain highly political in Brazil, this year and beyond.
The protest is ostensibly a response to higher fuel prices, workers have a list of other complaints, including vehement opposition to Petrobras’ $21 billion two-year divestment plan. The oil workers are now calling for the removal of Petrobras CEO Pedro Parente. It is unclear how far the protest will go or if oil production will be affected. A previous strike by oil workers in late 2015 temporarily shut in around 450,000 barrels per day (b/d) of production. Moreover, while much of the Brazilian population is demanding lower fuel prices, the danger is that fixed prices further undercut the finances of Petrobras, endangering production over the medium term. Whatever the case, higher fuel prices and oil production will remain highly political in Brazil, this year and beyond.