25.04.2012 Seite 1

3 Dimensions of Fuel Pricing

Political steps and principles

of setting effective fuel pricing mechanisms

Level of Prices

Regulation of Prices

Transparency of Prices

April 2012

Manfred Breithaupt, GIZ

Manfred.Breithaupt@giz.de

www.giz.de/fuelprices

25.04.2012 Seite 2 Page 2

International Fuel Prices – Current issues

January 2011: Failed attempt to raise fuel prices in Bolivia

January 2012: Semi-successful price increase in Nigeria (from

65 Naira to 141 Naira, back to 97 Naira, after two weeks of

protest)

March 2012: Two price adjustemnts in PRC: Gasoline prices

have smashed the 8 Yuan per litre ($1.27) benchmark

April 2012: Failed attempt in Indonesia (the anounced increase

from 4500 to 6000 Rupiah did not take place)

April 2012: German government considers price monitoring

Spring 2012: Fuel prices are major US election campaign

issue

Fuel pricing remains highly political

25.04.2012 Seite 3 Page 3

International Fuel Prices

Background

• Since 1991 GIZ carries out regular worldwide Fuel

Price Surveys. One of its goals is to provide a

worldwide comparison of retail prices to track / to

highlight energy price policies in developing

countries.

• Currently, data are available for 170 countries for

Diesel and Gasoline, based on (the last) survey in

Mid-November 2010

• Part of World Bank Indicator Set (World Development

Indicators, World Road Statistics, …)

• 2010 Survey available on: www.giz.de/fuelprices

25.04.2012 Seite 4

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Our new "International Fuel Prices

Observatory” factsheets offer

compact information on two pages:

•Price in USD and local currency

(some since 1991)

•Price composition (production costs,

taxes, fees, margins, etc)

•Pricing policy

•Transparency-traffic-signal on price

composition and pricing policy

•Related Links

NEW: Factsheets

Page 1

25.04.2012 Seite 7 Page 7

Our new "International Fuel Prices

Observatory” factsheets offer

compact information on two pages:

•Price in USD and local currency

(some since 1991)

•Price composition (production costs,

taxes, fees, margins, etc)

•Pricing policy

•Transparency-traffic-signal on price

composition and pricing policy

•Related Links

NEW: Factsheets

Page 2

In-depth discussion of fuel

pricing policies

25.04.2012 Seite 8

3 Key Issues

Price Level

Price Composition

Price Changes

25.04.2012 Seite 9 Page 9

Level of Prices: Benchmark lines

EU minimum level

Crude oil price ("Brent“)

US retail price level

Very high

fuel taxation

Fuel taxation

Fuel subsidies

Very high

fuel subsidies

Example: Super Gasoline Tanzania

Crude Oil /

Transport /

Refinery

VAT / General

Revenues

Road

Maintenance

External Costs

25.04.2012 Seite 10 Page 10

1. Principle 1: Cover Production/Transport/Refinery Costs.

Fuel prices cover the full costs of production/import, transport and refining including

depreciation and external costs of production (e.g. environmental costs)

2. Principle 2: Fuel taxes help finance the transport sector.

Fuel taxes can contribute to sustainable development in the transport sector

Road maintenance financing (rule of thumb: minimum of US 10 cents for road

maintenance, including 20 % for rural roads).

3. Principle 3: Internalisation of external costs and incentives for of energy-efficient

transport.

Directly related to fuel consumption and CO2 emissions.

Proxy for other social costs (like accidents (cf. road safety cent, congestion, etc.).

Eco-Tax.

4. Principle 4: Important contribution to general budget revenues.

Major contribution towards financing core state functions such as the health

services, education and security.

As fuel taxes are easy to collect they are a major source of revenue in many

countries.

Subject to full VAT as any other good.

25.04.2012

Level of Prices: Principles

25.04.2012 Seite 11 Page 11

0

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A F

ran

c /

Lit

er

Pricing mechanisms

Pricing concepts:

Ad-hoc pricing (incl countries

with constant prices)

Automatic adjustments /

regular adjustments based on

formulae

Liberalized markets

Objectives:

Increased acceptance

Lower fiscal implications

Lower political involvement and

risks

Increased energy security by

appropriate fuel pricing

mechanisms

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RS

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01.1

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007

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-cen

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on

25.04.2012 Seite 12 Page 12

Regulation of Prices

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on

Political vulnerability

Political interference

Temporary price shocks

High Low

Permanent price shocks Low High

Low Medium

Fiscal implications

High Low

Ad-hoc pricing is usually associated

with delayed and/or partial pass-

through

Automatic formulae are usually

associated with delayed but in long-

term full pass-through

Liberalized concepts provide full

pass through with minor delays

Permanent price shocks

vs. vs.

In face of a permanent price shock, the transition from ad-hoc pricing to automatic mechanisms

is politically very costly as huge steps are needed to adjust to international price levels as well as

previously accumulated fiscal burdens are substantial

0

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8

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25.04.2012 Seite 13 Page 13

1. Principle 1: Reflect Changes of

Production/Transport/Refinery Costs.

Fuel prices adjustments reflect changes of production/import,

transport and refinery costs including depreciation and external

costs of production (e.g. environmental costs)

2. Principle 2: Allow for inflationary adjustment

Fuel price adjustments allow for adjustment of inflationary

tendencies

3. Principle 3: Limit budgetary consequences

Fuel price adjustements shall limit bugdetary impact and indicate

clear exit strategies (in case of subsidies)

25.04.2012

Regulation of Prices: Principles

25.04.2012 Seite 14 Page 14

Transparency

0.48

0.07

0.10

0.11

0.00

0.10

0.20

0.30

0.40

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0.60

0.70

0.80

0.90

1.00

1.10

1.20

US

- D

oll

ar

/ litr

e

US average May 2010

Tax

Margins

Refinery

Crude Oil

0.59

0.30

0.01

0.18

0.00

0.10

0.20

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0.40

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

US

-D

oll

ar/

litr

e

India/ New Delhi

Sales Tax

Education Cess

Excise tax/Cenvat

Balance (Crudeoil, margins,refinery)

Crude+

refinery+

margins

0

0.2

0.4

0.6

0.8

1

1.2

Saudi Arabia

?

Transparency

25.04.2012 Seite 15 Page 15

Transparency

Price without Subsidies

Price with Subsidies

Accessible Information

25.04.2012 Seite 16 Page 16

1. Principle 1: Information on institutional stakeholders in price setting are published

Provide information on institutional stakeholders involved in determination of price

levels and elaboration of price adjustments

2. Principle 2: Principles of price setting are published

Provide information on determinants for pricing, on frequency of updates and the

underlying formula if automatic mechanisms are applied.

3. Principle 3: Information on price composition are published

Publish information on taxation levels and composition of fuel prices

4. Principle 4: Information on prices and price setting are made public in an easy-to-

access, comprehensible and accountable manner

Information shall be displayed on the Web including: Current price data for all fuel

products; Timelines of prices; price components (production and/or import prices,

taxation levels, and other charges); Explanation of structure and modus operandi of

pricing mechanisms (if applied); Underlying legislation.

25.04.2012

Transparency of Prices: Principles

25.04.2012 Seite 17 Page 17

Fuel Price & Regulation Map

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01.1

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US

-cen

ts /

gall

on

0

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Nov

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Dez

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Feb 0

8

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A F

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Very high

fuel taxation

Fuel taxation

Fuel subsidies

Very high

fuel subsidies

Transparency / Targeting

Monitoring /

Information

25.04.2012 Seite 18 Page 18

Passive or No Regulation

Ad-hoc Regulation

Rational Regulation

Very high

fuel taxation

Fuel taxation

Fuel subsidies

Very high

fuel subsidies

X – Price increase

without reform of regulation

and limited transparency

√ – 2nd step: Reform of

regulation (move towards

formulae based pricing

mechanism with regular price

review)

√ – 3rd step: Gradual

price increases (e.g. with

indexation)

Objective: Move towards

rational pricing, increase

transparency and improve

targeting of subsidies

Objective: Increase

transparency, build trust

through accountability and

de-politize fuel pricing

Objective: Increase

transparency through

government-sponsored

monitoring and

√ – 1st step:

Increase

transparency (of

composition of

prices and of

regulatory approach)

Fuel Price & Regulation Map

25.04.2012 Seite 19 Page 19

Fuel Price & Regulation Map: Empirical evidance (under prepration)

Price

Ad-hoc Regulation

Rational Regulation

Passive or No Regulation

25.04.2012 Seite 20 Page 20

Fuel Price vs Total Consumption (incl US)

Liberia French Polynesia Rwanda Nepal Mali Sierra Leone Madagascar Malawi Suriname Guinea Tajikistan Swaziland Barbados Mozambique Palestine Congo (Brazzaville) Guyana Mauritius Macedonia Zambia Cote dIvoire (IvoryCoast)

Zimbabwe Ethiopia Korea, North Cambodia Togo Burkina Faso Congo (Kinshasa) Nicaragua Paraguay Brunei Tanzania Uruguay Uganda Cuba Bangladesh Botswana Namibia Mongolia Burma (Myanmar) Cameroon Kenya Honduras Luxembourg Benin El Salvador Tunisia Sri Lanka Kyrgyzstan Panama Morocco Bolivia Jamaica Ghana Bahrain Angola Sudan and South

Sudan Costa Rica Singapore Guatemala Dominican Republic Jordan Turkmenistan Qatar Peru Libya Syria Norway Lebanon Yemen Uzbekistan Pakistan Oman Algeria Chile Turkey New Zealand Kuwait Taiwan Ecuador Philippines Kazakhstan Colombia Vietnam United Arab Emirates Argentina Iraq Egypt Thailand Ukraine Nigeria Korea, South Malaysia South Africa France India Venezuela Indonesia Australia Brazil Saudi Arabia United Kingdom Germany

Canada Russia Mexico Japan

China

United States

1

501

1001

1501

2001

2501

3001

3501

4001

4501

5001

5501

6001

6501

7001

7501

8001

8501

9001

9501

0 50 100 150 200 250 300

Co

ns

um

pti

on

of

Mo

tor

Ga

so

lin

e (

Th

ou

sa

nd

Ba

rre

ls p

er

Da

y,

20

08

)

Gasoline Price in US Cents (2010) Source: United States Energy Information Administration

25.04.2012 Seite 21 Page 21

3 Key Messages

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8

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Apr

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A F

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1

2

Introduce sensible regulatory approach

Reflect market forces (Global Demand vs Global Supply)

Acceptance ; Continous Adaptation of Patterns

Introduce (earmarked) taxes and duties: internal infrastructure costs, external costs, VAT

Acceptance ; Accountability

Crude Oil /

Transport /

Refinery

VAT / General

Revenues

Road

Maintenance

External Costs

25.04.2012 Seite 22 Page 22

Crude Oil /

Transport /

Refinery

?

3 Key Messages

3

Increase transparency

Acceptance ; Accountability

3-level approach with improved regulation, higher

transparency and targeted introduction of taxes can

help to reduce subsidies and / or increase sustainability

25.04.2012 Seite 23 Page 23

Armin.Wagner@giz.de www.giz.de/fuelprices