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The failure to allow Petrobras to raise domestic gasoline and diesel prices in line with world prices prompted its first loss in 13 years in the second quarter of 2012, and added more than $8-billion in 2012 losses at its refining unit. (SERGIO MORAES/REUTERS)
The failure to allow Petrobras to raise domestic gasoline and diesel prices in line with world prices prompted its first loss in 13 years in the second quarter of 2012, and added more than $8-billion in 2012 losses at its refining unit. (SERGIO MORAES/REUTERS)

ANALYSIS

How ‘hubris’ put a damper on Brazil’s energy spark Add to ...

But because ethanol also made up a quarter of all gasoline blends, the higher ethanol price also raised the pump price of regular gasoline. In response, the government cut the amount of ethanol in gasoline to 20 per cent in late 2011 to prevent it from boosting the inflation rate.

With its refineries running at full capacity, Petrobras was then forced to import gasoline at world prices and sell it at a loss.

“You get the feeling that the government is improvising,” said Luiz Pinguelli Rosa, a physicist and director of postgraduate engineering studies at the Federal University of Rio de Janeiro and formerly president of state-led utility Eletrobras under the previous government.

“These policies have hurt both Petrobras and the ethanol industry, which are important to our development,” Mr. Rosa said.

FORCING ELECTRICITY PRICES DOWN

The other big chill in the energy industry has resulted from Ms. Rousseff’s recent plan to force a decline in electricity prices. The measure was supposed to help stir the broader economy, but may prove to be a low point in her relationship with the private sector.

Brazil’s electricity prices were, until recently, the world’s third-highest, according to some studies. Ms. Rousseff announced a plan last year to push them down by 20 per cent.

The high prices are largely a result of taxes, which the government has had little success cutting. Lower rates will help consumers but could also make it hard for utilities to invest the tens of billions of dollars the government wants them to spend to expand service and build new dams to meet Brazil’s growing electricity needs, Mr. Rosa and Mr. Garman said.

Brazilian officials have said electricity companies will simply have to operate with lower profit margins than before to help make up the difference. Investors have responded by selling utility stocks.

Declines over the past year in the stock of Eletrobras, Latin America’s largest utility, have wiped out two decades of investors’ gains.

“The government is in a tight spot. Energy is now their Achilles heel,” said Oswaldo Telles, an energy analyst at Espirito Santo Investment Bank in Sao Paulo. “The price moves are the last card up their sleeve. If they don’t work, they will have to try something more drastic or give up on more goals.”

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