Understand what has been happening with diesel prices in 2018

The road freight transport strike of May 2018 in Brazil raised many questions about the claims desired by truck drivers.

One of the crucial points pointed out is related to the costs of road transport.

Diesel oil is the main input for trucks, and the price charged at service stations directly influences how much the carriers will have in return for their freight service.

The following graph shows the history of the S10 diesel price charged at Brazilian service stations between 2013 and 2018. May 2018 was the most expensive month in the series, when the average price was R$3,69 per liter, reaching reach R$ 4,89 per liter in some parts of the country.

The states where fuel is more expensive are those with the most difficult access in the north of Brazil (Acre, Amapá and Roraima), but also the states of Mato Grosso and Mato Grosso do Sul, where agricultural production is very high and requires a lot of transport.

Source: ANP. ILOS analyzes

The strong increase in the price of diesel over the last 12 months has been accompanied by enormous unpredictability in the amounts charged by service stations. This is because there have been changes in Petrobrás' pricing policy, which now allows daily changes in sales prices for refineries. The previous guideline was that the readjustments would be once a month.

These constant price variations drastically reduced shippers' predictability of how much they would need to spend on their main cost item. And this generates a great deal of uncertainty in relation to the freight price to be charged to industries contracting the transport service.

Note that the large companies that contract transportation usually negotiate freight prices with their carriers for a certain period, which can be 1 year, 6 months, 3 months…. but negotiations are not daily or weekly (except in specific cases or occasional operations), as this is operationally complex and makes longer-term contracts unfeasible.

That is, the value that the carrier receives for the freight service does not vary so much, but the costs began to vary greatly, with increases much more representative than those that occurred in previous years.

As the gain margin of carriers (especially self-employed ones) is very low, this unpredictable variation in diesel generated an unsustainable situation, to the point that, in many cases, the price received for freight does not pay all the carrier's costs.

As the economic recovery has not yet happened consistently, transport contracting companies also do not have enough breath to pay much more for freight, at the same time that transporters cannot “pay to work”.

For these reasons, the main claims in the strikers' negotiations with the government were related to diesel prices and the predictability of changes.

The establishment of a minimum tariff to be paid for freight is now under discussion, an action unlikely to be built in the format of an economy with free competition, based on the law of supply and demand, where price regulation is reckless and difficult to parameterize.