Energy and fuel price inflation in Brazil jeopardizes industry recovery plans

RIO DE JANEIRO, BRAZIL – Essential in the daily life of families and companies, a group of products in the energy sector is eroding the economy’s recovery. The electricity, gasoline, and diesel oil prices jumped at the end of last year and have not stopped rising since then.

In July, they were the main item responsible for inflation, according to the Broad Consumer Price Index (IPCA) – released by the IBGE. According to specialists, the scenario for 2022 is even more worrying, especially given the water crisis and the perspective of readjustments that impact the electricity bill.

“The contagion from the high prices of electricity and fuels is broad in the economy. It is difficult to measure because many variables influence it, such as competition and the pressure on costs. But we are certain of one thing: the impact is much bigger than what is materialized in the family budget and inflation,” says André Braz, assistant coordinator of the Consumer Price Index, at Fundação Getúlio Vargas (FGV).

Electricity is used by industry and also by service companies. The automobile industry, for example, uses a lot of energy in its robots to assemble cars. “If energy becomes more expensive, the industry increases its cost, and a part of this goes into the final price. The same thing happens with fuel,” says Braz. He points out that diesel oil moves the truck fleet that brings products to the urban centers. The fuel also moves urban buses, which transport people to work.

Among all the products in the energy group, gasoline and diesel are currently the big villains in prices, with increases of 39.65% and 36.35%, respectively, in the 12-month period until July this year. In this time interval, the two fuels have appreciated more than filet mignon (33.56%), considered a luxury product. Electricity, meanwhile, rose 20.09%, the highest since September 2018.

“The price pressure of this group of products works as a tax because it affects everyone. For now, there is access to credit. People are borrowing money to keep up with their bills. But next year, default tends to grow and then, yes, we may lose a lot,” says Carlos Thadeu de Freitas, chief economist of the National Confederation of Trade of Goods, Services, and Tourism (CNC).

The rise in prices, especially for electricity, may compromise recovery plans after a critical period due to the Covid-19 pandemic. The sector was resuming the production levels of 2013 when it was caught by the water crisis and the electricity tariff hike.

“The main concern is the increase in costs, passed on to product prices. This decreases demand. Therefore, it can affect the recovery of the economy and the recovery of production and industrial employment,” says Paulo Pedrosa, president of the Brazilian Association of Large Industrial Energy Consumers and Free Consumers.
Lower Margin

Gustavo Cardoso, partner of the factory DM Vidros, in the interior of São Paulo, says he already had contracted energy at a lower price for the whole year 2021. But he will be forced to buy a new supply for next year, precisely at this moment of overvaluation of the megawatt-hour (MWh). To get a better price, it has presented a proposal to contract for a longer period until 2025. Even so, it has not been very successful in the negotiations.

“We are going to reduce the margin because we have not been able to pass on the cost increase to our customers. We had to change our strategy in the short term. With the more expensive fuel, we were also forced to prioritize the closest customers,” he said.

In family budgets, besides electricity and automotive fuels, cooking gas has weighed heavily: in some cities it already costs more than R$100 per cylinder, 29.29% more expensive than last July, according to the IPCA. This is the highest recorded since May 2003. Consequently, the inflation of charcoal, used by poorer families for cooking, mainly when the price of the gas cylinder goes up, is also increasing (6.64%).

The rise in the price of the gas cylinder affects, for example, workers who resorted to selling meals to survive the crisis. André Luís Silva sells food on sidewalks in downtown Rio. This year, he started to lose money with fuel. Twice a week, he hitchhikes to work with a friend.

His profit also decreased with the high price of cooking gas. “I didn’t work because I didn’t have money to buy gas. I had to borrow from a neighbor to make money,” said Silva.