What factors decide fuel prices?
We are all affected by the ever increasing petrol, diesel, kerosene and LPG prices. These affect our day to day expenditure as any increase in fuel price increases cost of transport, impacting cost of all commodities.
You all must have read this or similar articles in the news.
Bloomberg
The government on June 25 permitted gasoline prices to be market-determined for the first time since December 2003. Political parties had previously avoided loosening controls to win support from India’s 828 million people who live on less than $2 a day. Diesel costs are regulated and will eventually be freed, the government said.
India’s move to pare its $5.5 billion oil subsidy, accounts for about 2.5 percent of its budget,
Prime Minister Manmohan Singh’s government allowed state refiners to set prices of gasoline higher by about 3.5 rupees (7.5 cents) a liter and that of diesel by 2 rupees, as it sought to cut subsidies and trim the budget deficit from a 16-year high
5 July 2010 Last updated at 12:50 GMT
Parties call strike over fuel prices
The strike has disrupted rail services
Normal life has been disrupted in many parts of India because of a strike called by opposition parties against fuel price rises.
What factors after all decide the fuel prices.
Can government play significant role in curtailing the prices?
What are the pros and cons, if the prices are reduced?
How does India compare with world wide prices of gasoline?
If we look at the prices of cars across the world, it is seen that the globalisation of world trade has leveled motor vehicle prices all over the world to such an extent that the price ratio for equivalent vehicles no longer exceeds about 1 to 2 between any two countries. Maximum import duties for vehicles in WTO member countries is also limited to about 25%.
However, transport fuel prices in different countries still differ on a scale of as much as 1 to 100. Thus the relative fuel price differences remain an issue of international debate.
The usage and pricing of gasoline results from following factors
• Crude oil prices
• Processing and distribution costs
• Local demand
• Strength of local currency
• Local taxes
• Availability of local sources of gasoline (supply).
Since fuels are traded worldwide the trade prices are similar, the price paid by consumers largely reflects national pricing policy: Some regions, such as Europe and Japan, impose high taxes on gasoline; where as others, such as Saudi Arabia and Venezuela, subsidize the cost. Western countries have among the highest usage rates of gasoline per person. The largest consumer of gasoline is the United States, which used an average of 386 million US gallons (1.46 giga litres) of gasoline each day.
Below chart gives the Oil production and consumption of major contributors.
It can be seen that the consumption of fuel in the advanced countries is quite higher compared to developing and under developed countries.
Some countries are lucky to have their own stocks of oil which favorably affect their trade.
The fuel policies of all countries in the world may roughly be assigned to one of the 4 fuel price categories which can be defined as follows:
Category 1: Very high fuel subsidies.
Countries with very low fuel prices, where diesel and gasoline are sold at prices even below the international crude oil price. Prices start at 1 US cent per litre for diesel fuel. In the case of oil producing countries in this category, prices – even if nominally taxed – are indirectly subsidised at the expense of the oil sector of a country. Gasoline prices in TURKMENISTAN (2 US cents per litre) and VENEZUELA (4 US cents per litre), INDONESIA and EGYPT are the lowest in the world. Other countries with a very high fuel subsidization are (Saudi Arabia, Kuwait, Bahrain, UAE, Oman. High subsidy in case of a country not producing oil may become a major cause of state deficit or even bankruptcy.
Category 2: Moderate fuel subsidies.
Countries with more or less subsidisation (sometimes of diesel fuel only) are China, Russia, maxico.
Category 3: Moderate fuel taxes.
By contrast in the countries like India, USA, Canada, Australia, Brazil, the increases in the price of oil are passed directly on to the consumers - without affecting the national budget.
Category 4: High fuel taxes
Where as countries in Europe, Hong Kong and Japan have fuels taxed highly. In JAPAN and the EU – where the total taxes on gasoline and diesel may even reach more than 1 US $ per litre. In countries like URUGUAY, ALBANIA, and SOUTH KOREA fuel taxation accounts for more than 20% of total state revenues.
Fuel subsidisation, as practised in VENEZUELA, YEMEN, INDONESIA and EGYPT may become a major cause of state deficit or even bankruptcy. The additional burden of other non-motor fuels, as subsidised cooking oil (kerosene) - may even aggravate the situation. In YEMEN they spend 17% of their total state revenues on subsidising fuel. In SOUTH KOREA they receive 33% of their total state revenues from fuel taxation.
A change in fuel price policy may even substantially contribute to avoiding the financial collapse of a state administration, especially in times of inflation. TURKEY, which increased diesel and gasoline consumer prices in the period 1995-2004 by the factor 3, is a good example.
Despite high demand in the country and despite rising fuel costs, gasoline prices were low in the United States when compared with most other Western countries. As of December 21, 2008, the United States average price of self-serve regular unleaded gasoline was $1.65/ga. In the US, the split of gasoline price in 2008 was , 72.7% for crude oil, 10% for refining, 11% to taxes, and 6% for distribution and marketing
Most European countries have high fuel taxes. The prices have traditionally been three to four times the price in the United States, thus the price of gas in Europe is more than triple the US price at €1.45/litre. Russia and some neighboring countries have a much smaller tax, with gasoline prices similar to the US
Below table would be interesting to the readers. It gives comparative prices of Gasoline in some countries. The actual price today may vary slightly depending on crude oil barrel price as on date, but the table gives a fair comparison,
Countries with subsidised gasoline
A number of countries subsidize the cost of gasoline and other petroleum products. Subsidies make transport of people and goods cheaper, but discourage fuel efficiency. In some countries, the soaring cost of crude oil since 2003 has led to these subsidies being cut, moving inflation from the government debt to the general populace, sometimes resulting in political unrest.
Fuel subsidies are common in oil-rich countries. Venezuela, which has vast oil reserves, maintains a price of around US$0.02, and has done so since 1998. Other countries with subsidized fuel include Iran, Saudi Arabia, Egypt, Burma, Malaysia, Kuwait, China, Taiwan, South Korea, Trinidad and Tobago, Brunei, Nigeria and Bolivia. On In 2010, the Bolivian government issued a decree removing subsidies which had fixed gasoline and diesel prices for the past seven years. Arguing that illegal export (contraband) to neighboring countries was harming the economy; Bolivia eliminated the subsidies and raised gas prices as much as 83%.
Indonesia
The implementation of fuel price rises requires a careful planning considering the local purchasing power. The danger of fuel price riots is real and experienced especially in lowest price countries like YEMEN, NIGERIA, VENEZUELA and INDONESIA. Although a step-by-step approach, avoiding price surges in excess of 10 % in real terms at one time is recommended, even much higher price increases were accepted by the population as in CAMBODIA.
In March 2005, Indonesia increased the price of gasoline and diesel by 29%, causing widespread protests. The price of gasoline was raised from US$0.20 per litre to US$0.25 per litre. Prices were increased again in October to US$0.48 a litre, an 87.5% rise. The price increases came as oil prices threatened to increase the government's oil subsidy to US$14 billion per year. This caused further protests.
With oil reaching over US$145 a barrel, Indonesia further increased prices in May 2008 to Rp US$0.65 per litre, This caused widespread protests. In addition, it was suggested that private car owners, who are wealthy in Indonesian terms, would eventually be excluded from subsidies entirely, with the cheap fuel limited to public transport and motorcycles.
People have been encouraged to switch to LPG for cooking, as Indonesia is the world's largest exporter, whereas its oil industry is in decline, and it is now a net importer. India also does have oil reserves but always has been a net importer.
Malaysia
Malaysia spends US$14 billion subsidising gasoline, diesel and gas each year. Effective June 2008 gasoline prices increased by 40% to US$3.30 a gallon, from US$2.32 a gallon. It was announced that price increases were planned to bring fuel prices in line with global market cost, suggesting that it may hit US$3.80 per gallon by August. The Malaysian government has also announced a yearly cash rebate of RM625 per year to Malaysian citizens who own cars with an engine capacity of 3,000 cc or less and RM200 tax rebate to cars with an engine capacity of 3,000 cc and above to offset the increased costs.
In June 2008 the Malaysian government announced plans to set up separate pumps at its border petrol stations to sell fuel to foreigners at market rates so that only locals can benefit from subsidised petrol. The new pumps will target Singaporeans and Thais who make day trips across the border to fill their tanks with cheaper fuel there, although Singapore-registered cars must have at their tanks at least ¾ full before they will be permitted to leave Singapore in any case.
Mexico
Mexican president has been subsidizing gasoline. This serves to quell inflationary pressures in Mexico. Many residents of US border communities cross the border to buy fuel in Mexico, thereby enjoying a fuel subsidy at the expense of Mexican taxpayers. This has caused supply shortages for Mexican drivers, especially truck and bus drivers who use diesel
India
INDIA has continuously increased prices and revenues from gasoline (consumer price now 87 US cents per litre) and diesel (now 62 US cents per litre) over the last 9 years
Protests against a hike in fuel prices shut down markets, schools, airports and businesses across India on 5 July 2010, and people were arrested as violence flared in some cities.
The YEMEN Case - “Petrol Riots leave 12 dead”
Public protests against a rise of fuel prices left at least 12 Yemeni dead, when on 20 July 2005 the police exchanged fire with armed men in the capital and several provincial towns. Road blocks and barricades were erected and stones have been thrown against government buildings. Slogans against the Prime Minister have also been heard.
At the previous day Deputy Prime Minister and Minister of Planning had declared via state satellite channel that the prices of diesel and gas are still subsidised und that the decision to rise them was inevitable, because otherwise the government would not be able to pay the salaries of its employees any more. He warned against emotional reactions. The local Daily Mail newspaper mentioned World Bank and IMF helping at economic reforms since 1995. However, on 26 July the Yemen Cabinet had to react. First it cut the price hikes for fuel and approved a law concerning wages and salaries to improve the living standards of civic and military employees (at a rate from 33% to 96% in different phases)
The argument of social sustainability and of reduced purchasing power caused by paying higher fuel prices are also common. This study measures local purchasing power in various countries in a way understandable to the general public. This study uses the egg index, which displays how many hen’s eggs are equal to 1 litre of diesel.
Today’s thinking
“savings from cut–down subsidies could be used to build more schools, hospitals and public facilities which would provide long-lasting benefits for our future generations”, Malaysian Minister Mustapa Mohamed said.
Middle East countries like Saudi Arabia, Kuwait, Bahrain, UAE and Oman, as well as Brunei are slowly following the trend of increasing their formerly low local fuel prices.
American oil producers like Trinidad and Colombia more or less follow the US price level whereby gasoline prices must at least pay for the roads.
European oil producers like Norway and Britain realise that high fuel taxes and all the “windfall” profits are urgently needed to finance the social requirements of government expenditures
The oil price explosion is impacting countries in different ways:
The de facto result of the momentary oil-price shock is tantamount a blow to any social concept of the energy sector, i.e. for government-set prices and exorbitantly high subsidies (especially in Indonesia and Yemen, but also in Bangladesh, Nigeria and Ghana). Such countries have reason to fear the emergency of chaotic conditions and political upheaval – like general strikes, hyper-inflation, national bankruptcy, etc.
But a few oil-producing countries (Iran, Saudi Arabia, Venezuela and Russia) are enjoying sufficiently high windfall profits to keep their subsidization policies going for a while to come. Among them is Saudi Arabia as it may produce crude oil at a cost of $ 2 per barrel only.
Low-tax countries ( China, Russia, maxico)
If long-term supply agreements are concluded with foresight, energy prices can be frozen to protect consumers and gain time for price adjustments, as has been the case in Thailand and China.
Conversely, when a government refuses on principle to adjust consumer prices, an unsecured national budget, inflation and public debt and/or subsequent devaluation are bound to result. All countries in this group have to pass the high world market prices on to the consumer, and that is what they are doing. This can mean a 70 % - 100 % rise in fuel prices for private consumers, and the consequences for the industry can be expected to include stunted economic growth (especially in Vietnam, the USA, Brazil and, Pakistan.
Moderate and High-tax countries ( India, USA, Canada, Australia, Brazil, Europe, Japan )
The progressively or purely market-oriented countries that have always taxed fuel heavily (e.g., Europe, the whole of French West Africa, Mexico, Morocco, Uganda and Brazil) have the least to fear from rising crude oil prices, because that price has only been accounting for 20 % - 40 % of the ultimate selling price, anyway.
These countries have done their fiscal-policy homework (structural adjustment) and now they can reap the benefits in the form of a survivable economy and national budget, including the social sector.
Main Issue: Transition to higher fuel taxation, however, is not limited to the above mentioned (RED) “problem countries”.
CHINA may face a special challenge in the future, if the successful economic model of SOUTH KOREA is followed, where oil consumption increased 6-fold in the 25 years between 1973 and 1998 [acc. to IEA, Oil Information 2002]. But it should be kept in mind that SOUTH KOREA followed European Tax policies.
Fuel Subsidy Expense and Tax Contribution to Total State Revenues
Subsidy Figures:
Venezuela spends 17 % of its total state revenues on subsidizing the fuel.expenditure on subsidy. Other countries: Malaysia 12%, Indonesia 10%.
Taxation figures:
South Korea receives 33 % of its total state revenues from fuel taxation revenue receipt from taxes. Others: USA 12%, UK 14%, India 15%, Japan 17%, Swiss 23%
Fuel Prices and Aaam Janata Psyche:
Undoubtedly, in the macroeconomic sense, imported goods such as motor vehicles and fuels should be calculated on a foreign-exchange basis like the US$, because that is how importers and governments render their payments.
For the country's political leaders, it is important to know that local consumers do not care about the world market; what they care about is their own purchasing power on the home market. Therefore the public psyche has to be prepared carefully for any increase of fuel prices, particularly in the case of structural price changes in afore mentioned subsidising countries.
Thus, governments should not only be aware of price levels in neighboring countries, they should also have arguments for a protesting population, i.e. the popular "purchasing power argument".
We in India pay high taxes and duties on petrol and diesel, higher than some developed countries like the United States and some Europeon countries. We pay approximately 52 per cent tax on petrol (duties, taxes like customs, excise, sales tax, VAT, dealer commission) and 31 per cent on diesel.
The Economic Times has an interesting table which gives a comparison of the major countries of the world. The data though old gives fair representation.
It doesn’t seem fair considering that incomes here are much lower than in developed countries! Lowering of fuel taxes lowers fuel prices. Agree lowering the taxes has two negatives. One that it encourages people to use more fuel and the country’s trade deficit increases. Two that lower tax collection deprives people of other benefits. But it is possible for the government to encourage other schemes like encouraging car pooling. Giving more incentive to public vehicles for discouraging private vehicles. Aggressively pursuing metro rails in all major cities. Most developed countries have this. Of course we need electricity for metro. India though slow, will certainly graduate to all this, I am confident!
Easier comparison:
Sometimes the “Hamburger Index” is recommended for locally produced food, but hamburgers are no common food outside the USA.
Therefore traditional hen’s eggs have been chosen by the author for a worldwide comparable index, the “Egg Index”. In this way a universally obtainable, non-subsidised, locally produced commodity is used as benchmark
“Asian Egg Index” shows that the average egg price in Asia is approximately 10 US cents per egg (with the remarkable exception of India and China with half of this price). This table demonstrates that the “right” price of eggs is well known all over the Asian population. Contrary to this the price of diesel fluctuates considerably.
Many oil-importing countries like Yemen, Jordan, and Uzbekistan (with diesel price equivalents of 2 eggs) have undergone the change of the public opinion, as took place in Turkey and India, where the diesel price equivalent is bigger than 10 eggs.
In Egypt 1 litre of diesel costs as much as 2 hen’s eggs;
In India 1 litre of diesel costs as much as 15 hen’s eggs.
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Unit conversions:
I US gallon = 3.79 Liters, 1 Imperial gallon = 5.55 liters, 1 barrel = 179 Liters
Note: The data reproduced in this article may not be recent and gathered from internet and other sources and is for giving comparative information.
