Issues in Domestic Petroleum Pricing in OilProducing Countries

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Title: Issues in Domestic Petroleum Pricing in OilProducing Countries

1
Issues in Domestic Petroleum Pricing in
Oil-Producing Countries

2
Introduction Why study domestic petroleum prices?

Many oil-producing countries keep domestic prices
below free market levels
Net oil importers in some cases do not fully
reflect international prices.
The resulting subsidies can be large and are
nontransparent
Few studies have quantified these subsidies for a
wide range of countries and examined their
economic effects

3
Subsidy Estimates Methodology

Subsidies can be broadly defined as the
difference between the reduced price of a good
with government support and the price of the good
in the absence of such support.
Subsidy (M-P)C
M free market price WDT
W world wholesale spot price
D marketing distribution transport costs
(importers only)
T general consumption taxes (VAT, etc.)
P after-tax retail price
C petroleum product consumption

4
Subsidy Estimates Caveats

Marketing, distribution, and transport costs
assumed to be the same across countries and time
periods introduces some error, esp. if pipeline
constraints create large marginal transport costs
However, transport costs are typically only about
2 percent of after-tax retail price
Excludes implicit subsidies due to tolerance of
nonpayments
Some retail price estimates are an average for
only a month or quarter (snapshot)

5
Subsidy Estimates Sample

Subsidies calculated for 86 countries between
1996-2000
1999 is the latest year available for most
countries. In this year, 62 countries in sample
15 Major Oil Exporters (of which, 13 subsidize)
6 Other Net Oil Exporters
41 Net Oil Importers

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Subsidy Estimates Results

Subsidies are large averaged 3.5 percent of GDP
in 1999 among major oil exporters
Among net oil importers, the average revenue from
petroleum taxation was 2.2 percent of GDP in
1999.
Subsidies positively correlated with world oil
price
Residential fuel oil and auto diesel subsidized
more heavily than gasoline

9
Economic Effects of Subsidies

Efficiency
In the absence of price distortions, most
efficient to set domestic prices equal to the
world wholesale spot price plus marketing and
distribution costs (WD)
Caveats
Need for government revenue may make net taxation
more efficient
Environmental externalities may argue for further
taxation (in excess of 100 percent, Parry 2001)

10
Economic Effects of Subsidies

On the other hand, large exporters may have some
monopoly power in world oil markets so that the
marginal revenue from exporting is less than the
world wholesale price plus marketing and
distribution costs

R revenue, X exports, ?X,P price elasticity
of world oil demand, and XW total world oil
demand
Marginal revenuelt(WD) if significant share of
world market (X/ XW is high) and ? X,P is low

11
Economic Effects of Subsidies

Thus, the opportunity cost of not exporting may
be lower than the world price for OPEC as a whole
or its dominant members.
The marginal revenue for OPEC can be as low as 25
percent of the non-market-power case.

12
Economic Effects of Subsidies
13
Economic Effects of Subsidies

Efficiency
On balance, the arguments for taxation outweigh
the arguments for subsidization
Need for government revenue
Environmental externalities
However, most major oil exporters subsidize,
resulting in efficiency (deadweight) losses
Assuming environmental externalities, deadweight
losses amount to 0.5 to 12.4 percent of GDP
Assuming no environmental externalities,
deadweight losses amount to between 0 and 7
percent of GDP

14
Economic Effects of Subsidies

Equity
Poorly targeted means of distributing purchasing
power to the poormajority of benefits go to the
non-poor
In Venezuela, the richest 20 percent receive 6½
times more in subsidies per person than the
poorest 33 percent (World Bank 1995)
In Ecuador, the more expensive energy products
received the highest subsidies, while household
kerosene, used by poor households, was not
subsidized (World Bank 1994)
Pro-rich bias compounded by possible smuggling
and corruption

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Economic Effects of Subsidies

Fiscal opportunity costs
In subsidizing countries, the average subsidy is
larger than the average fiscal deficit or total
health spending
In Ecuador and Venezuela, the implicit subsidy
exceeds public spending on health

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Economic Effects of Subsidies

Cyclicality
For net oil exporters, periods of high world oil
prices tend to be both periods of economic boom
and periods of higher domestic subsidies
Petroleum subsidies are thus procyclical,
exacerbating the effects of oil price shocks on
economic volatility

20
Successful Reform

Preconditions
Establish social protection mechanisms to
compensate losers (Indonesia) design using PSIA
Use publicity campaigns to inform public of
trade-offs (Egypt)
Timing
Optimal speed of reform depends on trade-off
between fiscal need and adverse social
consequences
Existence of good social protection mechanisms
allows faster reform
Political environment
External environmentperiods of low world oil
prices may facilitate movement to automatic price
mechanisms