Petrobras feels the downside of fossil fuel subsidies

Petrobras: A Case Where ‘Fossil Fuel Subsidies’ are Bad for an Oil Company

When most people hear the phrase “fossil fuel subsidies” it conjures up images of governments giving their hard-earned tax dollars to already highly profitable oil companies. That’s what they have been conditioned to think by certain activists and politicians, and quite naturally this image evokes outrage.

On more than one occasion, I have pointed out that the vast majority of these so-called fossil fuel subsidies are really governments keeping fuel prices artificially low for consumers. This is a subsidy because consumers aren’t paying the true price of the fossil fuel, and the amount of the subsidy is the difference between what consumers pay and the market price. In most cases, the primary beneficiary of the subsidy is the consumer, and the secondary beneficiary is the fossil fuel company who gets to sell more product than they otherwise might.

In oil producing countries, the government is typically the entity providing the subsidy. They do this by giving up revenue. For example, in Venezuela consumers can buy gasoline for pennies a gallon. The state-owned oil company Petróleos de Venezuela, S.A. sells gasoline at well below the cost to make it, and the loss of revenue to the government is the amount of the fossil fuel subsidy to the consumer. 

Then there’s the Brazilian oil company Petrobras (NYSE: PBR). Petrobras is one of the world’s largest oil and gas companies, and the largest company in Latin America. Petrobras is a publicly traded company, and in fact I personally have owned shares in the company since late 2008, when I bought them following the oil price crash in the second half of 2008. But the Brazilian government also owns the majority of the voting shares in the company, and that’s where things get interesting.

To combat rising inflation, Brazilian President Dilma Rousseff has stopped Petrobras from increasing its fuel prices. Because of strong demand growth in Brazil, the country is no longer self-sufficient in refining capacity. Therefore, Petrobras is actually being forced to import gasoline and sell at 8% below cost. This has resulted in an estimated $8 billion loss for 2012, which is the company’s first loss since 1999.

Now imagine for a moment what this actually means. Petrobras itself is eating this subsidy, which is benefiting consumers. But the subsidy gets tallied onto the roles of “fossil fuel subsidies” — even though in this case it is costing an oil company money. Taxpayers, activists, and politicians see this outrageous tally of fossil fuel subsidies and get angry at the oil company — which is getting killed by this subsidy.

It boggles the mind.

Source: An Oil Company Finds Itself On the Losing End of Fossil Fuel Subsidies