Brazil’s Petrol Subsidy Is a Tax on Its Own Ethanol Industry

Energy

Brazil spent fifty years building the only mass ethanol economy on earth, then answered an oil shock by paying nine cents a litre to make petrol cheaper and paying its ethanol nothing at all. The Brazil fuel subsidy row now paralysing the lower house is not about pump prices, it is about sugar.

Millions of Brazilian cars run on either fuel and drivers choose at the pump each week on price alone. Every centavo the state knocks off petrol narrows the margin on which the biofuel competes.

Hydrous ethanol received no subvention at all during the war. The country’s own constitution contemplates a proportionally lighter tax burden for the biofuel, and the emergency did the opposite.

What the Brazil fuel subsidy actually costs

Take the two remaining measures. Diesel support runs to five and a half billion reais a month, a little over a billion dollars, and petrol to one and three-tenths billion, around a quarter of a billion.

The planning minister has put the whole war-mitigation effort through June at up to sixteen billion reais. Set that beside a primary surplus target of thirty-four and three-tenths billion.

The oil shock has already eaten nearly half the year’s fiscal target. Keep the petrol subvention for another twelve months and it alone would consume some forty-five percent of it.

The government insists the target will be met without asking for extra room. Whether that survives an oil price that will not sit still is the open question.

A bill that changed shape

The instrument at the centre of the fight is a complementary bill filed on the twenty-third of April by the government’s own leader in the Chamber. Its stated purpose, in the text lodged with the house, is to set rules for revenue waivers to mitigate the economic impacts of the energy shock caused by the Middle East conflict.

It would let the Union offset fuel tax cuts with the extraordinary oil money the same shock generates, meaning royalties, production-sharing receipts, sector taxes and dividends. Urgency was approved unanimously on the twenty-ninth of April.

Then nothing happened, twelve times. Between the nineteenth of May and the seventh of July the item appeared and was not taken up, and the bill still sits marked ready for the floor.

What changed in the meantime was the text. Its rapporteur announced at a meeting of the parliamentary agriculture front that her report would guarantee a competitive differential for biofuels, and would also route extraordinary oil revenue toward renegotiating agribusiness debt.

A bill written to cushion motorists from a war acquired a farm-debt clause. That is not a scandal, it is how legislatures work, but a foreign investor reading the headline would never guess it.

Why the Speaker is suddenly a fiscal hawk

On Tuesday the president of the Chamber told party leaders he may put the bill to a vote if the government does not finish withdrawing the petrol subsidy. The threat reads as budgetary discipline and functions as something else.

He is closely tied to agribusiness, and the farm bloc is an important ally for his own re-election to the house leadership next year. The bill he is threatening to schedule is the one that now carries the biofuel and farm-debt clauses.

The sugar and ethanol producers want it passed, and they say so openly, because the petrol subvention has cut their competitiveness. The lever and the grievance point the same way.

Meanwhile the government has reversed itself twice inside a fortnight. On the second of July a minister declared the bill had lost its purpose because the war had ended, and was in talks to pull it from the agenda.

Then American aircraft struck Iran again, Iranian missiles answered against bases in Bahrain and Kuwait, and three merchant ships were hit near the Strait of Hormuz. Brent jumped more than five percent to just under seventy-eight dollars, its highest since the twenty-second of June.

The bill the executive wanted dead is now the weapon aimed at it. Ministers are weighing whether to delay the next withdrawal step entirely.

There is a further squeeze coming that few outside Brazil have noticed. The government is studying raising the compulsory ethanol content of petrol from thirty percent to thirty-two.

That would lift pump prices in much the same way as scrapping the subsidy does, and it would do so three months before a presidential election. Congress rises on the eighteenth, which leaves days rather than weeks.

How much is the Brazil fuel subsidy worth?

Diesel support costs about five and a half billion reais a month and petrol about one and three-tenths billion. The war package has cost up to sixteen billion reais so far.

Why does ethanol object?

Hydrous ethanol received no subvention while petrol did, so the state narrowed the price advantage the biofuel needs to win drivers at the pump.

What happens next?

Congress breaks on 18 July. Either the government ends the petrol subsidy or the Speaker may bring the rival bill to a vote before the recess.

Frequently Asked Questions

How much does Brazil's petrol subsidy cost per litre, and does ethanol receive the same support?

Petrol carries a subsidy of R$0.44 ($0.09) per litre, while ethanol, sold at the very same pump, receives no subsidy at all. This disparity means every centavo knocked off petrol narrows the margin on which ethanol competes, effectively shifting costs onto Brazil's ethanol producers.

How much has Brazil's emergency fuel package cost, and what is it measured against?

The emergency fuel package, introduced after the war drove oil prices up, cost up to R$16bn ($3.11bn) through June. This is measured against a R$34.3bn budget surplus target.

Why did the Brazil fuel subsidy relief bill take so long to pass through the lower house?

The relief bill sat unvoted through 12 sittings between 19 May and 7 July, effectively paralysing the lower house. Adding to the delay, the MP writing the bill added provisions favouring biofuels and a mechanism to steer windfall oil revenue into farm-debt relief, while Congress was set to rise on 18 July, leaving only days to settle the petrol subsidy.