Fuel pricing policy: How have
governments fared recently?
Masami Kojima
13 October 2016
Impact of low world prices
Issue
Major hydrocarbon exporter
Net importer
Government revenue Significantly down
Little
Pressure to reduce
price subsidies
Significant
Varies
Ease of price
subsidy reform
Challenging because of
general state of economy
Easier than before
Impact of price
subsidy reform
If fuel shortages and high
black market prices: not as
large as official prices would
suggest
Varies but likely to be less
than in major exporting
countries because of
generally higher domestic
prices, and in some cases
nil because prices may be
at cost recovery at this
point in time
If official prices hold: could be
significant because “savings”
are more than offset by
government revenue loss,
making compensation difficult
2
Challenge of fuel price volatility
World price increases in the first half of 2015 and 2016 tested commitment
to pricing reforms in some countries.
0.9
12
Regular gasoline, spot price
Diesel, spot price
10
LPG, Saudi Aramco contract price
0.7
Natural gas, average European border price
0.6
8
0.5
6
0.4
50%
0.3
4
60%
0.2
2
0.1
0
0
Jul 14
Oct 14
Jan 15
Apr 15
Jul 15
Oct 15
Jan 16
Apr 16
Jul 16
3
Natural gas price in $/mmBtu
$/liter (gasoline, diesel) or $/kg (LPG)
0.8
Impact of currency on world price volatility
World fuel price increases were exacerbated by currency depreciation in
some countries. Gasoline price increases were larger in local currency units
than $ increases in 2/3 of all countries, while diesel price increases
exceeded 100% in 4. Some countries faced smaller price increases.
200
180
Distribution of % price increase in local currency
% price increase
160
140
120
World gasoline spot price increase between Jan and May 2014
World diesel spot price increase between Jan and Jun 2016
100
80
60
40
20
 = Increase in US$
0
4
Comparison of retail regular gasoline prices
$1.40
Brazil
$1.20
US$/liter
$1.00
Vietnam
Jordan
$0.80
UAE
$0.60
$0.40
Nigeria: 2 adjustments
Kazakhstan
$0.20
Venezuela: 1 adjustment
$0.00
Jul 14
Oct 14
Venezuela
Jordan
Jan 15
Apr 15
Nigeria
Vietnam
Jul 15
Oct 15
Kazakhstan
Brazil
Jan 16
Apr 16
Jul 16
UAE
USA
5
Comparison of retail diesel prices
$1.20
Brazil
$1.00
US$/liter
$0.80
Jordan
Angola deregulated
since Jan 2016
$0.60
Kazakhstan
Kazakhstan
$0.40
UAE
$0.20
Venezuela, 0 adjustment
$0.00
Jul 14
Oct 14
Jan 15
Apr 15
Jul 15
Oct 15
Jan 16
Apr 16
Venezuela
Angola
Kazakhstan
UAE
Jordan
Vietnam
Brazil
USA
Jul 16
6
Retail prices of LPG for household use
$2.50
South Africa
US$/kg of LPG
$2.00
Brazil
$1.50
$1.00
$0.50
Jordan
Angola
Persian Gulf FOB
India
$0.00
Jul 14
Oct 14
Jan 15
Apr 15
Jul 15
Oct 15
Jan 16
Apr 16
Jul 16
Indonesia
Morocco
India
Angola
Jordan
Brazil
South Africa
Persian Gulf FOB
7
Different paths
Pricing policy
Countries
Rare, ad hoc price increases or price
freezes for years at a time
Algeria, Ecuador, Egypt, Iran, Kuwait,
Saudi Arabia, Turkmenistan, Venezuela
Rare price adjustments
Bangladesh, Bolivia, Cameroon,
Mozambique, Niger, Sri Lanka, Tunisia
Large price subsidies for certain fuels
with infrequent adjustments
LPG in Indonesia, Morocco, Tunisia;
kerosene in India; diesel in Venezuela
Monthly adjustments of fuel prices
Jordan, Madagascar, Malawi, UAE
Monthly or semi-monthly adjustments of Kenya, South Africa, Tanzania, Vietnam
price ceilings
Deregulation of certain fuels
Angola (gasoline, diesel), Nigeria
(diesel)
Trade restrictions or high export tariffs
Kazakhstan, Russia (in the past)
Free or heavily-discounted-price fuels
Especially for power generation
Domestic supply obligation
Gas in Nigeria
Implicit government control of prices
Brazil
Deregulation with targeted assistance
Chile, Philippines, Turkey
8
Official vs. actual policy in practice
Law 9478 deregulating fuel prices was fully “implemented” by Dec 2001.
R$ per 13-kg cylinder
60
LPG producer price
LPG retail price
50
40
30
20
10
0
Jan 11
Jul 11
Jan 12
Jul 12
Jan 13
Jul 13
Jan 14
Jul 14
Jan 15
Jul 15
Jan 16
Jul 16
Jan 16
May 16
Sep 16
3.5
R$/liter
3.0
2.5
2.0
1.5
1.0
Diesel producer price
0.5
0.0
Jan 13
May 13
Sep 13
Jan 14
May 14
Sep 14
Diesel retail price
Jan 15
May 15
Sep 15
9
Coping with price volatility: Attempts at smoothing
• Price stabilization fund is intuitively attractive:
– Save in times of low world prices, spend in times of high world
prices
– Self-financing, achieving price smoothing at no cost to
government
• Self-financing if prices revert to the mean frequently
– Since 2001, reversion to the mean has not held
– Either prices are not smoothed much, or large budgetary
transfers to the fund ($0.7 billion in Chile, $2.4 billion in Peru)
• Another challenge: growing fund balance invites political
pressure to spend
– “It is very hard to have a huge sum of money at the bedside and
to tighten your belt at the same time.”
10
Fuel price stabilization fund in Vietnam
• Base prices set for 92 RON gasoline, E5, kerosene, diesel
and fuel oil
Fund balance,
• Stabilization fund
billion đồng
4,000
21,000
3,500
19,000
3,000
17,000
2,500
15,000
2,000
13,000
1,500
11,000
9,000
7,000
5,000
Nov 14
1,000
RON 92 calculated price
RON 92 price ceiling
Kerosene calculated price
Kerosene price ceiling
Mar 15
Jul 15
Nov 15
500
0
Mar 16
Jul 16
Jun 13
Sep 13
Dec 13
Mar 14
Jun 14
Sep 14
Dec 14
Mar 15
Jun 15
Sep 15
Dec 15
Mar 16
Jun 16
đồng/líter
23,000
11
Chile adjustable fuel tax (MEPCO)
Two-component tax, fixed and variable. Limits weekly price
increases and decreases and follows a numerical formula strictly
Prices are deregulated – no market interference or distortions
850
750
Ch$/liter for diesel
650
550
Ch$/liter for regular gasoline
450
350
Price with MEPCO
Price without MEPCO
Price with MEPCO
Price without MEPCO
12
Concluding observations
• Oil price collapse of 2014 dramatically reduced price
subsidies without much government action
– Victory claimed for “slashing” subsidies
– But political commitment was tested when prices rose
• Much smaller fiscal space for compensation adds to the
challenges faced by major oil exporters
• Absent adequate competition, price ceilings may be
needed – continuing government price control
• Power sector and fuel sector have to work together on
pricing reforms for natural gas, coal, and fuel oil
– Low power tariffs and/or poor payment discipline make fuel
pricing reforms difficult
13
Concluding observations (continued)
• Implementation of automatic pricing mechanisms
requires very strong political commitment – many
countries fail to implement them systematically
– Temptation is to lower prices when world prices fall, without
matching increases when world prices rise
– Announce new prices at the specified time interval, even if no
changes, and cite reasons for no change or departure from policy
• Key challenge is government policy response to fuel price
volatility, and especially significant price increases in the
future
– Frequent, small price increases to introduce flexible fuel tax may
be an option for dealing with future volatility
14