Aligning with the soft performance of the U.S. equities sector for the first day of trading in 2023, Brazil’s state-run petroleum firm Petrobras (NYSE:PBR) tumbled badly, losing 9% in the morning before declining 10% in the early afternoon. Newly appointed leadership for the company emphasized a sharp focus on renewable energy. Unfortunately, investors — likely spooked by transitional difficulties — exited swiftly from PBR stock.
According to OilPrice.com, Brazil’s leftist President Luiz Inacio Lula da Silva took office on Monday, sending jitters in its market. In particular, Lula “promised high-level social spending, including an extension of the fuel tax exemption.” Notably, Reuters mentioned that the exemption will cost Brazil’s treasury $9.9 billion in lost income.
Last week, Lula selected political ally Jean Paul Prates as the new CEO of Petrobras. Sharing the new administration’s progressive views on the future of energy, Prates blasted the current leadership team for driving Petrobras “off a cliff” due to its near-exclusive focus on oil and natural gas. Under new management, Prates seeks to have PBR stock rank among the top renewable energy investments.
To be fair, economic justification exists for the pivot toward renewable energy sources. Brazil’s new mines and energy minister Alexandre Silveira, while supporting the expansion and modernization of Petrobras’ refineries, also stressed the importance of developing renewable sources. Silveira stated that deficits in refining capacities made Brazil’s population “hostages to the importation of oil products and natural gas.”
Simultaneously, the energy ministry sought to “revalue” biofuels and include them in Brazil’s main energy system. However, this disclosure likely imposed a sticking point for stakeholders of PBR stock.
Theory and Reality Clash for PBR Stock
Certainly, the wild events of 2022 — in particular geopolitical flashpoints and skyrocketing inflation — made Brazil’s population inclined for a leadership change. Per Zacks, pricing policies surrounding the underlying business of PBR stock “caused the ouster of three CEOs during the term of outgoing president Jair Bolsonaro after an increase in fuel prices stoked voter frustration in an election year.”
Therefore, on paper, diversification to biofuels seems a reasonable approach to reducing net energy prices. Indeed, the U.S. Environmental Protection Agency (EPA) states that “[i]n contrast to fossil fuels, which are exhaustible resources, biofuels are produced from renewable feedstocks. Thus, their production and use could, in theory, be sustained indefinitely.”
However, the growing pains involved in such an energy pivot likely scared shareholders of PBR stock. According to the Massachusetts Institute of Technology (MIT), feedstock inputs for biofuels represent a greater expense than petroleum. In addition, the processes involved in producing biofuels lack the efficiency necessary for cheap production.
Further, a transition to biofuels may impose a broader economic impact on Brazil. Per the EPA:
“Biofuel feedstocks include many crops that would otherwise be used for human consumption directly, or indirectly as animal feed. Diverting these crops to biofuels may lead to more land area devoted to agriculture, increased use of polluting inputs, and higher food prices.”
While such a pivot might reinvigorate (in some ways) Brazil’s agricultural sector, crop and livestock production account for 8% of the nation’s GDP. However, the oil and gas market represents 10% of Brazil’s GDP. Thus, sacrificing dominance in the politically questionable but economically viable petroleum industry for the ideologically expedient but financially impractical biofuel pivot has many worried about PBR stock.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.