Brazil May Raise Fuel Prices by Up to 6 Percent

Source: Reuters 8/11/2014, Location: South America

The Brazilian government could increase domestic fuel prices at refineries by up to 6 percent after the October presidential election, a senior government source told Reuters.

The official, who asked not to be named because of the sensitivity of the issue, said an increase of between 5.5 percent and 6 percent is a preliminary calculation and aims to help state-run oil company Petroleo Brasileiro (PETR4.SA), known as Petrobras.

President Dilma Rousseff, who is running for re-election on Oct. 5, has kept fuel prices below international levels to curb above-target inflation. That policy has hurt the finances of Petrobras, which is forced to buy fuel at international prices and sell it more cheaply in the local market.

"The increase would give Petrobras some room in case there is a spike in oil prices abroad. That way the government would not need to make abrupt price adjustments," the official said.

The source also said that the government knows it will not be able to meet its key fiscal savings target in 2014 due to a slowdown in the growth of tax revenues.

In an interview with Reuters last week, Finance Minister Guido Mantega signaled that the government could raise fuel prices after the election and review its primary surplus target for the year.

The primary surplus, which represents the public sector's excess revenue over expenditures before debt payments, has fallen well below expectations this year. Many analysts believe the government will have to cut its goal of a primary surplus of 99 billion reais ($43.52 billion) or 1.9 percent of gross domestic product.

In the first six months of 2014, the primary surplus was equal to 1.17 percent of GDP.

Fuel prices and public spending are key in the government's battle to curb inflation, which has risen less than expected recently but remains at the 6.5 percent ceiling of the official target.

High inflation and sluggish growth have dragged down the popularity of Rousseff and raised the probability of a second-round run-off vote later in October.

Her rivals, centrist senator Aecio Neves and former Governor Eduardo Campos, have criticized fuel price controls that have undermined Petrobras, which is considered the world's most indebted and least profitable major oil company.

Neves told TV Globo late on Monday that if elected he would increase fuel and electricity prices as needed to restore investors' confidence, but did not give details of the size of the adjustment.

In July, the price of gasoline sold by Petrobras was on average 14 percent lower than international values, according to data compiled by GO Associados. In November, the government did it last fuel price adjustment, raising the wholesale price of gasoline by 4 percent and diesel by 8 percent.

Petrobras said it expects large cuts in money-losing gasoline and diesel imports thanks to growing Brazilian output of natural gas liquids, which can be easily distilled into gasoline. The company also expects fuel transportation improvements and the planned Nov. 4 startup of RNEST, a new refinery near Recife, Brazil.

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