Big Oil’s Big Problems: Inflation, Corruption, and Geopolitical Tension

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Source: thinkstock

Source: thinkstock

It’s been a rough couple of months for Petrobras (NYSE:PBR), Brazil’s state-run oil and gas giant. Shares listed on the New York Stock Exchange are down nearly 23 percent this year to date as the company and its investors digest a mountain of bearish news ranging from an underwhelming year-end report to an ongoing investigation into possible bribery.

The big blow came early in December when the Brazilian government, which controls both fuel prices in the country as well as a voting majority in Petrobras, announced an underwhelming increase for the price of fuel. Petrobras has lost more than 30 billion Brazilian reals ($12.77 billion) over the past two years because it has resisted increasing fuel prices in an effort to fight domestic inflation, which is currently running at about 5.7 percent compared to a target rate of 4.5 percent.

The state has kept fuel prices low over the past few years despite the fact that oil prices have doubled since hitting a trough below $50 per barrel in the wake of the 2008 financial crisis. This policy, although a firm strategy in the face of rampant inflation, has eroded the oil company’s earnings because the firm has essentially been selling fuel at a discount.

Credit Suisse analyst Vinicius Canheu captured the significance of the underwhelming price increase – 4 percent for gasoline and 8 percent for diesel — when, days after the announcement, he downgraded the stock from Buy straight to Sell.

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