Petroleo Brasileiro SA (NYSE: PBR), commonly called Petrobras, announced on Friday that it is raising the prices it charges for gasoline and diesel fuel by 4% and 8%, respectively. This is the fifth rise in diesel prices and the third in gasoline prices in the past year and a half. The price hike became effective at midnight and Brazilian drivers will see the higher prices at the pump beginning on Saturday.
The price increase announced yesterday is expected to raise pump prices by about 3%. A gallon of gasoline in Brazil sold for around $4.60 before the hike was announced.
Brazil’s problem is that inflation is eating away at its economy and the country’s central bank has been raising interest rates in an effort to cool things off. The government, which owns the majority stake in Petrobras, has also been trying to keep the lid on pump prices, forcing Petrobras to sell gasoline for less than it costs to produce.
But keeping the price of gasoline low has the unintended effect of driving up demand. That was predictable. A second unintended effect is that the low price of gasoline has forced the country’s ethanol producers to keep their prices low and the country’s ethanol industry is also being forced to sell ethanol at prices too low to make a profit.
More than half of Brazil’s automobile fleet is comprised of flex-fuel vehicles that are able to use either gasoline or pure ethanol. But because ethanol contains only about 70% of the energy of gasoline, the price of ethanol must be at least 30% below the price of gasoline or consumers won’t buy it. The low price of gasoline is also driving ethanol producers out of business and the country finds itself in the awkward position of having to import ethanol, often from the U.S.
The government, which was badly stung in August when it raised bus fares by $0.10 and thousands of people took to the streets, has been reluctant to allow Petrobras to adjust prices on any sort of regular schedule that would reflect global prices. Instead, the company has to plead with the government for a price hike and usually the raise is too small and too late.
Petrobras now says that it has adopted and gotten approval for a new plan that would allow the company to adjust prices at regular intervals. What the company will not do is disclose details of the plan, so the adjustments may continue to be arbitrary regarding timing.
Shares of Petrobras closed up about 1% on Friday at $15.94 in a 52-week range of $12.03 to $20.63. After Friday’s price hike, shares are likely to trade higher on Monday as well.