Fuel pricing policy: How have

governments fared recently?

Masami Kojima

13 October 2016

Impact of low world prices

2

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

Challenge of fuel price volatility

3

0

2

4

6

8

10

12

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16

Na

tura

l g

as p

rice

in

$/m

mB

tu

$/lite

r (g

aso

line

, d

iese

l) o

r $

/kg

(L

PG

)

Regular gasoline, spot price

Diesel, spot price

LPG, Saudi Aramco contract price

Natural gas, average European border price

50%

World price increases in the first half of 2015 and 2016 tested commitment

to pricing reforms in some countries.

60%

Impact of currency on world price volatility

4

0

20

40

60

80

100

120

140

160

180

200

% p

rice incre

ase

Distribution of % price increase in local currency

World gasoline spot price increase between Jan and May 2014

World diesel spot price increase between Jan and Jun 2016

= Increase in US$

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.

Comparison of retail regular gasoline prices

5

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16

US

$/liter

Venezuela Nigeria Kazakhstan UAE

Jordan Vietnam Brazil USA

Nigeria: 2 adjustments

Brazil

Jordan

Kazakhstan

Vietnam

Venezuela: 1 adjustment

UAE

Comparison of retail diesel prices

6

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16

US

$/liter

Venezuela Angola Kazakhstan UAE

Jordan Vietnam Brazil USA

Venezuela, 0 adjustment

Brazil

Jordan

Angola deregulated

since Jan 2016

Kazakhstan Kazakhstan UAE

Retail prices of LPG for household use

7

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 Jul 16

US

$/k

g o

f LP

G

Indonesia Morocco India Angola

Jordan Brazil South Africa Persian Gulf FOB

South Africa

Brazil

Jordan

Angola India

Persian Gulf FOB

Different paths

8

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

price ceilings

Kenya, South Africa, Tanzania, Vietnam

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

Official vs. actual policy in practice

9

0

10

20

30

40

50

60

Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16

R$ p

er

13

-kg c

ylin

der LPG producer price LPG retail price

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Jan 13 May 13 Sep 13 Jan 14 May 14 Sep 14 Jan 15 May 15 Sep 15 Jan 16 May 16 Sep 16

R$/lite

r

Diesel producer price Diesel retail price

Law 9478 deregulating fuel prices was fully “implemented” by Dec 2001.

Coping with price volatility: Attempts at smoothing

10

• 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.”

Fuel price stabilization fund in Vietnam

11

• Base prices set for 92 RON gasoline, E5, kerosene, diesel and fuel oil

• Stabilization fund

5,000

7,000

9,000

11,000

13,000

15,000

17,000

19,000

21,000

23,000

Nov 14 Mar 15 Jul 15 Nov 15 Mar 16 Jul 16

đồ

ng

/lít

er

RON 92 calculated price

RON 92 price ceiling

Kerosene calculated price

Kerosene price ceiling 0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Jun

13

Sep 1

3

De

c 1

3

Ma

r 1

4

Jun

14

Sep 1

4

De

c 1

4

Ma

r 1

5

Jun

15

Sep 1

5

De

c 1

5

Ma

r 1

6

Jun

16

Fund balance, billion đồng

Chile adjustable fuel tax (MEPCO)

12

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

350

450

550

650

750

850

Ch$/liter for regular gasoline

Price with MEPCO Price without MEPCO

Ch$/liter for diesel

Price with MEPCO Price without MEPCO

Concluding observations

13

• 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

Concluding observations (continued)

14

• 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