Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Brazil Tariffs Could Reshape Global Energy Trade
Transcript
- Lucas: So there's a headline this morning that I think a lot of people in energy markets are still digesting — the US just slapped a 25 percent tariff on most Brazilian goods. And the stated reason is 'unfair trade practices.' Luna: Right — that's a pretty broad stroke. And it's not just about manufactured goods, is it? Brazil is a massive energy player. Lucas: Exactly. Brazil is the ninth-largest oil producer in the world, and it's one of the top exporters of ethanol and soy-based biodiesel. So when you put a 25 percent tariff on Brazilian goods, you're directly affecting energy supply chains. Luna: And we're already seeing some movement. WTI crude is at 79.36 this morning, up about 1.6 percent in the last five days. Brent is at 84.48. So oil's been climbing anyway, but this tariff adds a new layer. Lucas: It does. And the interesting thing is that oil itself is not explicitly targeted by the tariff — crude oil isn't a 'good' in the sense that manufactured items are. But the tariff applies to processed fuels, biofuels, and even some petrochemical feedstocks. So the impact is indirect but real. Luna: Let's talk about ethanol specifically. The US is the world's largest ethanol producer, but we still import Brazilian ethanol — about 600 million gallons last year. That's mostly sugarcane ethanol, which has a lower carbon intensity than corn ethanol. Lucas: Right. And a 25 percent tariff on that could push up prices for ethanol blends in the US, which might actually benefit domestic corn ethanol producers. But it could also slow down the adoption of lower-carbon fuels, which is a consideration for refineries trying to meet renewable fuel standards. Luna: So it's a bit of a mixed bag for the clean energy side. Meanwhile, the oil side is watching something else: Brazil's offshore pre-salt fields. Those are some of the lowest-cost, highest-quality crude sources in the world. If tariffs make it harder to import Brazilian crude — even indirectly — that could tighten supply. Lucas: But here's the thing: the US doesn't actually import that much Brazilian crude. Most of Brazil's oil exports go to China and Asia. So the direct crude impact might be limited. Where I think we'll see the bigger effect is in the refined products and biofuels space. Luna: And that's where the oil-renewables divergence gets interesting. Because if biofuels get more expensive, that could actually support oil demand — at least in the short term. But it could also accelerate the search for alternative feedstocks. Lucas: Let's look at some data. Clean energy ETFs: ICLN is at 19.08, down 1.3 percent over the last five days. TAN, the solar ETF, is at 55.80, up 1.5 percent — but that's volatile. Enphase is at 44.05, down almost 2 percent. So clean energy stocks are not exactly rallying, despite the tariff potentially helping domestic biofuels. Luna: And on the oil side, the XLE energy ETF is up 3.1 percent over five days, at 56.50. XOM is up 5.1 percent, CVX up 4.3 percent. So the divergence is still there — oil stocks are outperforming clean energy by a wide margin. Lucas: And that divergence is partly what we've been tracking for weeks. But this tariff adds a new variable. It's not just about oil versus solar anymore. It's about trade policy reshaping the cost structure of different energy sources. Luna: So what does this mean for the average investor? If you're holding clean energy ETFs, you're probably feeling a bit of whiplash. The tariff could be a headwind for solar and wind because it raises costs for materials like steel and aluminum — though those aren't Brazil's main exports. Lucas: Right — the tariff is on Brazilian goods, not on Chinese solar panels. So the direct impact on solar is minimal. But the indirect effect is that it could increase inflationary pressures. The CPI just came in at 332.6 for June, down from 333.98, so inflation is easing — but a broad tariff could reverse that trend. Luna: And if inflation ticks up, the Fed might hold rates higher for longer. That's bad for clean energy stocks, which are more sensitive to interest rates because of their high capital costs and long-term project horizons. Lucas: Exactly. So the tariff is a double-edged sword: it might help domestic biofuels and oil refiners, but it could hurt the broader clean energy sector by keeping rates elevated. And it could also impact natural gas, since Brazil is a growing LNG importer — but that's a different story. Luna: Let's stay on the oil side for a minute. The tariff could actually be a net positive for US oil producers if it reduces competition from Brazilian biofuels and refined products. That could support refinery margins, which have been strong already. Lucas: Yeah, US refiners have been running hot. The XOP, which tracks exploration and production companies, is up 3.4 percent over five days at 164.86. And COP, ConocoPhillips, is up 3.2 percent. So the broader energy sector is seeing inflows. Luna: But there's also a geopolitical angle. Brazil is not exactly a hostile nation — it's a major trading partner. So this tariff could strain diplomatic relations, which might affect cooperation on energy security and climate policy. Lucas: That's a good point. Brazil is a key player in the global energy transition, with huge hydropower capacity and growing offshore wind potential. If trade tensions escalate, it could slow down joint ventures in renewable energy between US and Brazilian companies. Luna: And let's not forget about the 10-year breakeven inflation rate, which is at 2.23 percent, down slightly from 2.25. That suggests markets are not panicking about inflation from this tariff yet. But it's something to watch. Lucas: Right. So the market is still digesting. But I think the key takeaway for today is that this tariff is not just a trade story — it's an energy story. And it's another factor that could keep oil stocks elevated while clean energy struggles. Luna: And it reinforces the divergence we've been seeing. If you look at the five-day performance, XLE up 3.1 percent, ICLN down 1.3 percent. That's a pretty stark gap. Lucas: It is. And I think investors need to be aware that trade policy is now a major driver of energy sector performance. It's not just about supply and demand anymore — it's about tariffs, geopolitics, and the regulatory environment. Luna: We should also mention that the tariff applies to most Brazilian goods, but there are exceptions. And the timing is subject to negotiation. So this could change quickly. Lucas: Absolutely. This is a developing story. But for now, it's another headwind for clean energy and another tailwind for oil and gas. And it's a reminder that energy economics is increasingly intertwined with trade policy. Luna: You know, one thing I appreciate about this show is that we dig into these connections without any ads or sponsors skewing the analysis. It's just two people trying to make sense of the data. Lucas: Yeah, and that's intentional. We deliberately don't run ads because we want the conversation to be about the economics, not about selling something. If you find that valuable and want to support it, there's a simple way — buy me a coffee dot com slash fexingo. That's it, no pressure. Luna: Exactly. And it helps us keep doing what we're doing, diving into stories like this Brazil tariff and what it means for energy markets. Lucas: So back to the tariff — what are the downstream effects we should watch? One is gasoline prices. Regular gasoline is at $3.85 a gallon, up from $3.78. If the tariff pushes up biofuel costs, that could put upward pressure on pump prices. Luna: And that's politically sensitive. Higher gas prices are never popular, especially in an election year. So there might be pressure to renegotiate or carve out exceptions for energy products. Lucas: Right. And the Fed is watching too. Chairman Warsh has been meeting with the administration, and he's defending the Fed's independence. If tariffs cause inflation to tick up, the Fed might have to adjust its rate path. Luna: So the ripple effects are broad. It's not just about energy stocks — it's about the whole macro environment. Lucas: Exactly. And that's why we're focusing on it today. So to sum up: the 25 percent tariff on Brazilian goods is a new variable in the energy equation. It could support US oil and biofuels, but it could also keep clean energy under pressure and add to inflation concerns. We'll be watching how it unfolds. Luna: And as always, we'll keep tracking the data. Thanks for listening.