Brazil Considers a Shift in Transportation Fuels

The Brazilian government is trying to reconcile the needs of state-controlled energy company Petroleo Brasileiro, commonly known as Petrobras, with its own desire to keep inflation low for the sake of the country's consumer market and manufacturing sector. As part of this goal, Brasilia appears intent on promoting ethanol consumption. According to recent media reports, the government may announce a 7 percent increase in gasoline prices as early as next week. Moreover, there is speculation that the government will soon increase the mandated blending of ethanol in gasoline from 20 percent to 25 percent.

The promotion of ethanol consumption has not been as economically viable in recent years. Increased consumption and poor sugarcane harvests have driven up the price of ethanol, which in turn has contributed to the rising demand for gasoline. As a result, Petrobras has been forced to import more gasoline to meet demand, and the company's finances have become stressed accordingly. A greater reliance on ethanol might make prices more volatile — the agriculture sector is inherently unpredictable — but it could allow Brasilia to more easily implement the gasoline price hike Petrobras has been pushing.