Lula faces 1st clash with foreign oil companies – 03/23/2023 – Market

The surprise creation of a tax on oil exports in Brazil generated a conflict between the Lula government and the large foreign companies in the sector that operate in the country and generated distrust in the market, shortly before the government completed one hundred days.

Repsol, TotalEnergies, Shell, Equinor and Galp went to court after the government decided, at the end of February, to establish a new tax of 9.2% on oil exports.

The tariff, valid between March and June, was announced on the same day that the Minister of Finance, Fernando Haddad, announced the partial resumption of the collection of federal taxes on gasoline and diesel, suspended by the previous government of Jair Bolsonaro in the middle of the election period.

“We will have the opportunity to attract interested parties, not only Petrobras, but also other oil companies for internal refining” of oil, said the Minister of Mines and Energy, Alexandre Silveira, when defending the tariff.

Brazil is the world’s ninth largest oil producer, averaging 3.02 million barrels of oil per day.

In power since January, Lula promotes increased public spending to finance successful social policies, such as those that marked his previous mandates (2003-2010), which allowed, above all, to lift 30 million Brazilians out of poverty.

But the economic reality is far from the bonanza of that time achieved by the ‘boom’ of commodities. The growth forecast for 2023 is weak (+0.88), while interest rates are among the highest in the world (13.75%).

Without resources, the government “looked for the easiest solution, in which it fights with fewer people and is at odds with fewer people”, said economist Juliana Inhasz, professor of Economics at Insper.

It is a decision “more political than economic” because that way the government prevents Brazilians from paying more for fuel, he explained to AFP.

With this decision, the government found a way to offset the BRL 6.6 billion transferred in federal tax collection and ensure greater fiscal balance, according to the Treasury.

‘Opened the gate’

But the signs that the Lula government gave to the market and to the oil sector, responsible for 15% of the industrial GDP of the largest economy in Latin America, triggered some alarms.

The Abep (Brazilian Association of Oil and Gas Exploration and Production Companies), linked to the IBP (Brazilian Institute of Oil and Gas), filed last Tuesday (21) on behalf of the oil companies an unconstitutionality action against the measure to STF (Federal Supreme Court) to prevent the tariff from being charged.

The IBP said that the tax has a potential negative effect on the collection of federal and state taxes and on the generation of jobs, in an industry that employs 450,000 people.

Shell Brasil said it was concerned about the measure announced “without significant dialogue”, which brings uncertainty about new investment decisions.

Exporters also feel harmed by the decision, which they consider a breach of contract in relation to when they decided to invest in the country.

Taxes reduce companies’ profit margins and can discourage investment, making it less attractive to produce in Brazil, explains Lívio Ribeiro, a researcher at Ibre-FGV (Brazilian Institute of Economics at Fundação Getúlio Vargas).

The tax conveys insecurity to the market, in addition to the oil sector, he said.

“It opened a door. It makes sense that in the next rounds of auctions inside oil or outside, the agents start to include in this pricing a risk of rule change”, said the researcher.