BMI View: Tinkering with fuel prices is an effective inflation-busting strategy for Brazil at the moment, but undermines the value of the country's sovereign wealth fund, which is heavily reliant on the state-run oil company. The Brazilian government plans to force the fuels retail arm of state-run oil company Petrobras to reduce fuel prices by 6-10% as the country struggles to control inflation. Fuel prices have been pushed up by a combination of poor sugarcane harvests, which have cut the supply of ethanol, and high international crude oil prices. Although this latest intervention should help to keep down inflation, government pressure over fuel prices has already damaged Petrobras's share price, cutting the value of Brazil's sovereign wealth fund, which is heavily exposed to the national oil company (NOC). Although Petrobras does not have a monopoly on fuels retail in Brazil, it plays a key role in price setting because of its near-monopoly of refining and its large network of fuels retail stations. As the company is state owned, its role has typically been to keep prices at a manageable level for consumers. Its most recent price change was in mid-2009, in the midst of the global economic downturn, when it ...

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