Inflationary spurts are taking place all over the world, but it is not correct to say that this is “global inflation”. Even considering that the origin of the phenomenon is located in the economic consequences of the pandemic, which affected the entire world, now potentiated by the war in Ukraine, the causes of inflationary pressures, in essence, are always local.
It is true that the rise in international oil prices is at the root of inflationary pressures everywhere. But, the way to face the problem differs in each place. In Brazil, for example, the policy of absorbing foreign prices by Petrobras, which provides for automatic transfers of foreign increases, adds fuel to the fire of inflation.
Higher fuel prices — gasoline, diesel and gas — in 2021 were responsible for more than a third of the total inflation of 10.06%. The containment of price increases in this segment, which has the power to spread cost pressures throughout the economy as a whole, as other countries do, however, faces resistance.
A bill, passed in the Senate in March, provides for rules to stabilize fuel prices, but sleeps in the House. It foresees the creation of price bands, maintained by resources from a federal fund created for this purpose.
In the discussion of the matter, the creation of an oil export tax was on the agenda, but ended up being withdrawn from the approved text. This tax, however, would be a less interventionist form of market mechanisms to contain fuel prices. That’s what economist Julia Braga, a professor at UFF (Fluminense Federal University), defends, specializes in exchange rate issues and inflation.
“Several countries are imposing restrictions on exports”, says Julia Braga, stressing that the tax she proposes operates more within the mechanisms of the market. “It is possible to design flexible rates that, even after applying the tax, continue to be profitable to export”, says the economist.
In the following interview, Julia Braga details the operation and the repercussions on the economy of the adoption of a crude oil export tax, with variable rates:
Is it not possible, in the current situation of the international market, to avoid such strong and frequent increases in fuel prices?
Julia Braga — I think it is possible, if a tax on the export of crude oil is adopted. This idea has already been discussed in the Senate, but was removed from the approved text and sent to the Chamber. The export tax was part of a set of measures that included the creation of a price band for fuel.
The bands idea was approved, but without the export tax. The approved project, however, leaves open the interpretation that an export tax could be created when international prices rise too much. The approved project is stalled in the Chamber, in the face of resistance from oil companies and also from the federal government, but the point is open and, therefore, can return to the negotiating table.
How could an export tax on oil prevent these frequent and sharp rises in fuel prices?
The tax would help to form a tax revenue to be used to contain prices, but, before that, it would be a way to achieve this containment by associating the flexible rate that would be applied with the tax on crude oil exports and the very rule of Petrobras prices. This would be an interesting tribute not only to oil and fuels, but to all the main commodities exported by Brazil.
How would that work?
The first thing to understand is that commodity prices are determined in international markets. It is a peculiarity of commodities to obey the so-called law of one price, according to which if the product is identical, its price will be the same in any producing country.
Prices are based on world demand and supply, without reference to domestic demand and domestic production. So exporters are, in the end, just price takers. They practice the international price converted into the local currency, regardless of domestic production costs and domestic demand.
In these circumstances, exporters practice a rate of profit equivalence, considering what they can export and what they can sell domestically. When a tax is imposed on the right to export, this rate of profit is obviously reduced by the exact amount that will have to be collected with the tax. The net profit after tax reduces the equivalence rate and, thus, encourages an increase in the volume destined for the domestic market, allowing for lower prices in this market.
Petrobras adopted an import price parity rule whose logic does not take into account the fact that the company is currently a large oil producer and very competitive in the market. It makes a direct application of the profit equivalence rate.
Can it be said that the export tax acts to better balance foreign and domestic sales?
The tax mainly guarantees that, in the domestic market, the price is lower. The adjustment promoted by the export tax is via price, not via quantity.
Several countries are imposing physical restrictions on exports. The tax operates more within market mechanisms. It is possible to design flexible rates that, even after applying the tax, continue to be profitable to export.
Very strong increases in international prices, such as those registered in the oil market in 2021, end up determining also excessive prices for fuels, generating extraordinary profits. Faced with such extraordinary profits, a tax does not prevent exports from continuing to be advantageous, especially when it comes to Brazilian pre-salt oil, which is highly competitive.
International quotations are very volatile, would the export tax mechanism also operate in the opposite direction if prices fell too much, as in 2020?
Yes, at those times, the tax rate would be reduced or even zeroed. With quotations below US$ 50, for example, which is considered a kind of equilibrium price, considering the exchange rate, the rate would be zero.
The idea is to maintain the profitability of the business, filtering out situations in which quotations are very high, generating extraordinary profits just for this circumstance. The rate has to be variable and its effect has to be concentrated in the short term, as if it were just delaying readjustments, without exceeding a profit limit that keeps the business attractive.
With this, it would not be necessary to create a price range — the bands provided for in the project approved by the Senate —, which would require directly interfering with Petrobras’ price rule. The adjustment would be automatic, based on the export tax rate.
Wouldn’t there be a risk of shortages, as critics of interventions in the established price rules claim?
It is good to separate the short from the medium or long term. In the medium term, the export tax encourages investment in refining. But it is clear that a refinery takes a few years to be ready. The desirable expansion of refining capacity is something for the medium term.
In the very short term, if importers are unable or unwilling to charge a lower price, net of profit equivalence — that is, the foreign price converted from dollar to real, but deducting the tax rate — there is no impediment for Petrobras occupy this space, not least because the state-owned company also imports derivatives.
Brazil has the advantage of having a strong market leader, why give up that advantage? At the end of the process, importers are more likely to adapt to a new reality. It makes no sense, then, to talk about shortages. If any importer decides to leave, Petrobras, again, can occupy the space.
I think it is important to highlight that the incentive to expand refining capacity meets a logic that can be applied to other commodities that the country exports in large volumes. There are now incentives for the manufacturing industry, which is in crisis in Brazil.
Finally, the measure is also a kind of industrial policy. It would promote an inversion of incentives, currently in the direction of the export of raw products, to sell abroad a greater volume of more processed products. It’s kind of incredible that this isn’t the case because Brazil has huge cost advantages in many commodities, especially oil.
Why is such a simple idea, with so many advantages, even applied in other countries, resisted in Brazil?
I don’t have an answer for that, I just know that this debate among economists is having a hard time getting off the ground. I think resistance comes from prejudices in relation to price interventions in the market, which all other countries do, and much more so after the pandemic, as the markets became disorganized with Covid-19.
What the conventional theory clings to with all its strength, that market prices are the only valid indicators of the productivity of factors of production, this has already fallen apart the world over. And the whole world is adopting intervention policies.
It also has resistance in relation to taxation. There is a lot of resistance in this field and we can prove it when we see that everyone agrees that tax reforms are necessary, but reforms never get off the ground. It is even understandable why new taxes are never really neutral, they change relationships within the distributive conflicts in society and affect the interests of sectors, companies and people.