Privatising Petrobras

Brazil’s state oil company is turning into a political football.

Brazil’s state oil company, Petrobras, has a long and storied history – it’s the country’s largest and most visible company internationally and its executives wield significant political influence. Amidst soaring inflation, the company earlier this month announced an 8.87% increase in the price of diesel at its refineries. Politically, the administration of president Jair Bolsonaro (“Bolsonaro”), cannot sit aside – high petrol prices are bad politics during an electoral year.  

Last week, Brazil’s minister for mines and energy, Adolfo Sachsida, announced a privatisation proposal for Petrobras. While members of the government and advocates of reducing the presence of the state in the country’s economic relations celebrated the announcement, representatives of the federation of oil workers stated that the president will see “the biggest strike in the sector’s history” if the proposal is progressed in congress.  

According to professor Sérgio Lazzarini – a specialist in privatisation at São Paulo’s Insper Institute, “It is very unlikely that Petrobras will be privatised by the current government. For starters, the overall objective of the process seems to be wrong. Bolsonaro wants to get rid of Petrobras to avoid criticism that he should intervene and avoid an escalation of prices.”

“It is very unlikely that Petrobras will be privatised by the current government.”

Prof. Sérgio Lazzarini, São Paulo’s Insper Institute, Brazil

Indeed, the government would be better off considering the pros and cons of privatisations in terms of operational efficiency and social impact. In the context of Petrobras, and gas prices in particular, the problem seems to be associated with lack of sufficient competition in the oil refinery sector.  

Notably, there is strong political support for the entity’s privatisation. Earlier this month, economy minister Paulo Guedes stated that the ‘Investment Partnerships Programme’ – part of his ministry – will proceed with studies to privatise Petrobras. During a debate over the weekend, Alexis Fonteyne, deputy leader of the Novo party stated that he was in favour of privatisation explaining that the company monopolises exploration and refinement in Brazil, “If we had a free market … we would have competition to deliver better products at lower prices.” 

Such political support is not backed by broad public sentiment. According to an Ipespe survey conducted last week, only 38% of respondents were in favour of privatisation. Interestingly, 44% of respondents believed that privatisation will lead to higher not lower fuel prices.  

Yet addressing this problem does not necessarily require privatisation. Petrobras could sell its stakes in refineries and could attract more private investment in the sector to increase supply. However, the populist and interventionist tendencies of the current government are factors that cause risk for private investment. Privatisation requires good governments that design and enforce an appropriate policy and regulatory framework,” adds Professor Lazzarini. 

“Privatisation requires good governments that design and enforce an appropriate policy and regulatory framework.”

Prof. Sérgio Lazzarini, São Paulo’s Insper Institute, Brazil

The idea that privatisation will solve Petrobras’s problems or rising fuel costs is misplaced. Keep in mind that oil prices are dictated internationally and heavily influenced by external factors. It is true that across Latin America, private companies have tended to be more efficient when it comes to managing resources and production costs. However, oil is a global commodity and therefore what influences prices most is not the efficiency of a particular extractives company, rather the fluctuations of the global energy market.  

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