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Felicity Bradstock

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Felicity Bradstock is a freelance writer specialising in Energy and Finance. She has a Master’s in International Development from the University of Birmingham, UK.

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Brazil’s Oil Industry Shakeup Could Be Devastating For Its Economy

Following the ousting of the CEO of Brazil’s state-controlled oil group Petrobras by President Bolsonaro earlier this week, experts fear what greater intervention might do to the country’s oil industry. 

The removal of CEO, Roberto Castello Blanco, from his position at the head of Petrobras came following a conflict with the President over energy price hikes. Fears that price increases in diesel would cause protests led Bolsonaro to oppose a Petrobras price hike under Castello Blanco. 

President Bolsonaro quickly replaced Castello Blanco with former Defence Minister Joaquim Silva e Luna, who has no previous experience in the industry. However, the outspoken ex-CEO is hitting back, warning that a policy of state intervention could put artificial limits on the price of fuel. Castello Blanco explained, “If you want to have a market economy, you have to have a market price. Prices below have many consequences, some predictable and others unpredictable, but all negative,”.

The former CEO seemed to also make a statement in his clothing choice, wearing a T-shirt with the slogan “Mind the Gap”. This reflects the 2019 Petrobras slogan, which referred to its aim of closing the performance gap with top oil and gas firms around the world. It is thought that greater state intervention could further widen this gap. 

Following the change in leadership, Petrobras stocks plummeted, losing 20 percent of their value on Monday, around $13 billion. This also had a negative effect on Brazil’s currency, which decreased in value by 2 percent. 

Related: How High Can Oil Really Go?

This is not the first time that Brazil’s oil industry has battled with state intervention. Petrobras was on the verge of filing for bankruptcy under former President Dilma Rousseff, who subsided fuel prices wreaking havoc on the industry. 

At present, Brazil pegs its oil to international rates, however as the state has a 36.8 percent stake in Petrobras, and 50.5 of the voting rights, Bolsonaro holds the cards for fuel pricing. 

While the president has assured the public that his actions do not equate to “interference’, based on previous fuel subsidies by the state, international investors are unsure of the president’s intentions. 

With the general election set to take place in 2022, Bolsonaro is trying to win public support from key demographics. Reducing fuel costs could significantly influence thousands of truck drivers, who have been protesting against increasing fuel costs. 

The President has also hinted at greater intervention in the energy sector over the coming weeks, this time with a focus on electricity. “If the press is worried about yesterday’s switch [in CEO], next week there will be more,” he stated. “We will put a finger on electricity, which is also a problem”.

However, greater intervention in the energy sector could discourage foreign investment in the country. Having been hit hard by the Covid-19 pandemic, this is a worrying prospect for Brazil’s economy. 

James Gulbrandsen, chief investment officer for Latin America at NCH Capital stated of the move, “If Bolsonaro interferes with electricity pricing, it’s probably game over for his ability to attract foreign capital,". 

Castello Blanco had won national and international favour for Petrobras, reducing the company’s debt, pushing for greater independence, and making the company attractive to growing oil markets such as India. We are yet to see if Silva e Luna will garner the same respect. 

By Felicity Bradstock for Oilprice.com

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