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