Mines and Energy Minister Edison Lobao said Friday the Brazilian government wants state-run energy giant Petroleo Brasileiro (PBR, PETR4.BR), or Petrobras, to act as the regulator of the domestic ethanol market in order to reduce pressure on prices.

"Petrobras will now produce ethanol more intensively in order to be the regulator of this market," said Lobao in a television interview. "I asked Petrobras President Jose Sergio Gabrielli to do this two days ago."

The government's action comes amid a surge in ethanol prices.

The acceleration of ethanol prices is due to an inter-harvest shortage of sugarcane, the raw material used in ethanol production.

In addition, a jump in global sugar prices has caused many mills to opt for production of the sweetener rather than ethanol, further exacerbating the fuel shortage.

"Ethanol output was cut because of the price of sugar. Mills are preferring to produce sugar instead of ethanol," said Lobao.

According to Lobao, Petrobras will build ethanol stocks in order to avoid shortages during the inter-harvest period.

Regarding gasoline, Lobao ruled out a hike in prices amid global market volatility. The minister said that he expects prices to stabilize in the short term.

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