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 1
 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

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 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

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25.04.2012 Seite 4
25.04.2012 Seite 5
 NEW: Factsheets
Page 1 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

25.04.2012 Seite 6
Page
 NEW: Factsheets
Page 2 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

 In-depth discussion of fuel

pricing policies

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 3 Key Issues

 Price Level
 Price Composition
 Price Changes

25.04.2012 Seite 8
 Level of Prices: Benchmark lines
Example: Super Gasoline Tanzania
Very high
fuel taxation

EU minimum level

Fuel taxation

US retail price level

Fuel subsidies
Crude oil price ("Brent“)
Very high
fuel subsidies

External Costs

Crude Oil /
Road
Transport /
Maintenance
Refinery

VAT / General
Revenues

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 Level of Prices: Principles
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.
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 Pricing mechanisms
900

800

700

CFA Franc / Liter

600
 Pricing concepts: 500

400

300

 Ad-hoc pricing (incl countries 200

100
with constant prices) 0

 Automatic adjustments /

07

08
8
08

08
08

08
07

08

08
8

08

08
l0
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n

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Ju
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No

No
Ja

Ju
Fe
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Au

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O
regular adjustments based on 1200

formulae 1000

 Liberalized markets 800

RSA-cents / litre
600

400

 Objectives: 200

 Increased acceptance 0
Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08
 Lower fiscal implications 450

 Lower political involvement and

400
350
US-cents / gallon

300
risks 250
200
 Increased energy security by 150
100
appropriate fuel pricing 50
0
mechanisms
01.10.2007

01.11.2007

01.12.2007

01.01.2008

01.02.2008

01.03.2008

01.04.2008

01.05.2008

01.06.2008

01.07.2008

01.08.2008

01.09.2008

01.10.2008

01.11.2008
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 Regulation of Prices
1200
900 450
800 1000 400
350

US-cents / gallon
700
300
800

RSA-cents / litre
vs.
CFA Franc / Liter

600 250

500 vs. 600

200
150
400
100
400
300 50
0
200

01.10.2007

01.11.2007

01.12.2007

01.01.2008

01.02.2008

01.03.2008

01.04.2008

01.05.2008

01.06.2008

01.07.2008

01.08.2008

01.09.2008

01.10.2008

01.11.2008
200
100
0
0
Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08
07

08
8
08

08
08

08
07

08

08
8

08

08
l0
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v

v
n

n
b
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Ju
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No

No
Ja

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Ad-hoc pricing is usually associated Automatic formulae are usually Liberalized concepts provide full
with delayed and/or partial pass- associated with delayed but in long- pass through with minor delays
through term full pass-through

Political vulnerability
Low Temporary price shocks Medium

High Permanent price shocks Low

Political interference

High Low

Fiscal implications

High Permanent price shocks Low

 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

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 Regulation of Prices: Principles

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)

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 Transparency

Saudi
India/ New Delhi US average May 2010 Arabia
1.20 Sales Tax 1.20 1.2
1.10 1.10
Education Cess
1.00 0.18 1.00 1
0.90 0.01 Excise tax/Cenvat 0.90
0.80 0.80 0.8

US - Dollar / litre
US -Dollar/litre

0.30 Balance (Crude

0.70 0.70 Tax
oil, margins, 0.11
refinery) Margins
0.60 0.60 0.10
Refinery 0.6
0.50 0.50 0.07
Crude Oil
0.40 0.40
0.4
0.30 0.59 0.30
Crude+ 0.48
0.20 0.20
0.2
0.10
refinery+
0.10
margins ?
0.00 0.00
0

Transparency

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 Transparency

Accessible Information
Price with Subsidies
Price without Subsidies
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 Transparency of Prices: Principles
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.
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 Fuel Price & Regulation Map

Monitoring /
Information
Very high
fuel taxation

Fuel taxation

Fuel subsidies
Transparency / Targeting
Very high
fuel subsidies

1200
900 450
800 1000 400
350

US-cents / gallon
700
800 300
RSA-cents / litre
CFA Franc / Liter

600 250
500 200
600
150
400
100
300
400
50
200 0
200

01.10.2007

01.11.2007

01.12.2007

01.01.2008

01.02.2008

01.03.2008

01.04.2008

01.05.2008

01.06.2008

01.07.2008

01.08.2008

01.09.2008

01.10.2008

01.11.2008
100

0 0
Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08
07

08
8
08

08
08

08
07

08

08
8

08

08
l0
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No

No
Ja

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Se
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 Fuel Price & Regulation Map
Objective: Increase Objective: Increase
Objective: Move towards
transparency, build trust transparency through
rational pricing, increase
through accountability and government-sponsored
transparency and improve
de-politize fuel pricing monitoring and
targeting of subsidies

Very high
fuel taxation

Fuel taxation
X – Price increase
without reform of regulation
and limited transparency
√– 3rd step: Gradual
price increases (e.g. with
indexation)
Fuel subsidies

Very high
fuel subsidies √ – 2nd step: Reform of
√ – 1st step: regulation (move towards
formulae based pricing
Increase mechanism with regular price
transparency (of review)
composition of
prices and of
regulatory approach)

Ad-hoc Regulation Rational Regulation Passive or No Regulation

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

Passive or No Regulation

Rational Regulation

Ad-hoc Regulation

Price

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 Fuel Price vs Total Consumption (incl US)

9501
United States
9001
Consumption of Motor Gasoline (Thousand Barrels per Day, 2008)

8501

8001

7501

7001

6501

6001

5501

5001

4501

4001

3501

3001

2501

2001

1501 China

1001 Japan
Mexico
Russia Canada
Germany
Saudi Arabia
501 Venezuela Indonesia Australia
India Brazil UnitedFrance
Kingdom
United Malaysia
Nigeria
Sudan and
Egypt
Arab South
Iraq
Emirates South
Ukraine
Argentina
Vietnam
Kazakhstan Philippines AfricaKorea,
Cote
Thailand
Colombia South
dIvoire
Kuwait
LibyaAlgeria
Oman
QatarYemen
Turkmenistan
Bahrain Ecuador
Brunei Angola
Burma Ghana
Bolivia
Korea, Taiwan
Pakistan
Uzbekistan
Syria
Kyrgyzstan
El
(Myanmar)
Botswana
North Lebanon
Jordan
Guatemala
Dominican
Costa
Jamaica
Panama
Salvador
Tunisia
Benin Sri
Honduras
Namibia
Guyana
Sierra Mongolia
BangladeshRica
Morocco
Lanka
Cameroon
Tanzania
Nicaragua
Ethiopia Congo
Cambodia
Togo
Mozambique
GuineaCongo
Tajikistan New
Chile
Peru
Uganda
Paraguay
Barbados
Swaziland
Suriname
Leone
Liberia Nepal Zealand
Republic
Singapore
Kenya Luxembourg
Uruguay
(Kinshasa)
Burkina
Zimbabwe Faso
Macedonia
(Brazzaville) Polynesia Norway
Cuba
Zambia
Mauritius
Palestine
Madagascar
Mali Malawi
French
Rwanda Turkey
1 Sudan (IvoryCoast)
0 50 100 150 200 250 300
Gasoline Price in US Cents (2010)
Source: United States Energy Information Administration

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 3 Key Messages
900 1200

800
1000
700

800
CFA Franc / Liter

600

RSA-cents / litre
500
600
400

1
300 400

200
200
100

0 0
Nov 07 Dec 07 Jan 08 Feb 08 Mar 08 Apr 08 May 08 Jun 08 Jul 08 Aug 08 Sep 08 Oct 08
07

08
8
08

08
08

08
07

08

08
8

08

08
l0
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Ju
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No

No
Ja

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O
 Introduce sensible regulatory approach
 Reflect market forces (Global Demand vs Global Supply)
 Acceptance ; Continous Adaptation of Patterns
External Costs

Crude Oil /
Road
Transport /
Maintenance
Refinery

2 VAT / General
Revenues

 Introduce (earmarked) taxes and duties: internal infrastructure costs, external costs, VAT
 Acceptance ; Accountability

25.04.2012 Seite 21
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 3 Key Messages

3
Crude Oil /
 Increase transparency
Transport /
 Acceptance ; Accountability
Refinery
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 22
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Armin.Wagner@giz.de www.giz.de/fuelprices
25.04.2012 Seite 23
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