How are other countries in the region mitigating fuel price increases?

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By Ro­drigo Ibar­rola

In the last few weeks, fuel prices have un­der­gone vari­a­tions, first down­ward, then up­ward, and fi­nally down­ward again due to Petropar’s po­si­tion of main­tain­ing its prices. These move­ments were jus­ti­fied by the rise in the dol­lar ex­change rate. Of course, news such as these pos­si­ble in­creases cause a lot of ir­ri­ta­tion among con­sumers. The gov­ern­ment, for its part, is tak­ing a more pas­sive po­si­tion or is let­ting events take their course, i.e., it does not plan to do any­thing about it.

And we say “do noth­ing” be­cause there is no way that, in this con­text of in­fla­tion due to ex­ter­nal shocks (Ukraine war, in­suf­fi­cient re­fin­ing ca­pac­ity, freight bot­tle­neck, etc.), the price of fuel can drop with­out state in­ter­ven­tion. It is true that Paraguay has prices above the av­er­age for the re­gion (Graph 1), but it is also true that the other coun­tries in­ter­vene in one way or an­other in the mar­ket to mit­i­gate the in­fla­tion­ary ef­fect. There is prac­ti­cally no coun­try that does not do so.

Fig­ure 1. Av­er­age fuel prices in South Amer­i­can coun­tries, in dol­lars

Source: Own, with data from Global Petrol Price, as of 10/​17/​22. Note: the price in Ar­gentina is lower for Paraguayans if pur­chased with pe­sos ac­quired in our ter­ri­tory.

Be­fore re­view­ing the re­gional mea­sures, it is nec­es­sary to clar­ify that Paraguay does not im­port crude oil be­cause it does not have re­finer­ies. What is ac­quired from abroad are de­riv­a­tives, i.e. diesel or naph­tha. The prices of these, in re­cent months, have re­mained sta­ble, al­though rel­a­tively high, af­ter an up­ward trend.

Con­trary to what some ex­perts say, the price of oil is not trans­ferred in­stan­ta­neously to the cost of fuel. The lat­ter op­er­ates with a cer­tain lag since it first needs to be re­fined to ob­tain the de­riv­a­tives, so nei­ther the rise nor the fall in prices should have a rapid im­pact on the in­ter­na­tional price of fu­els. But this is also where im­porters’ ex­pec­ta­tions re­gard­ing fu­ture re­place­ment costs come into play. This, in turn, causes cost vari­a­tions to be passed on to con­sumers, which in prac­tice gen­er­ates what is called “asym­me­try in price trans­mis­sion”, which is ba­si­cally when prices do not re­spond in the same way to a rise or fall in the in­ter­na­tional price, ei­ther in speed or mag­ni­tude. Thus, in the face of an ex­pected rise, com­pa­nies gen­er­ally ad­just their mar­gins in an­tic­i­pa­tion of a higher fu­ture cost. But that is an­other story. What is cer­tain is that sooner or later the rise in oil prices will have to have an im­pact on the fi­nal price, and it is in sit­u­a­tions like the cur­rent ones that gov­ern­ments in­ter­vene to soften the abrupt changes.

All coun­tries use some mech­a­nism to mit­i­gate fuel price in­creases, in­clud­ing ex­plicit sub­si­dies, sta­bi­liza­tion funds, tax cuts, price con­trols through state-owned com­pa­nies, or a com­bi­na­tion of these. Thus, we will pre­sent a sum­mary of the in­ter­ven­tions in the re­gion.

First, we will ad­dress ex­plicit sub­si­dies. This mea­sure is taken by coun­tries such as Bo­livia, which is a pro­ducer and, in ad­di­tion, ag­gres­sively sub­si­dizes fu­els by up to 80%, thus achiev­ing one of the low­est fuel prices in the re­gion. In Ecuador, an­other of the coun­tries with the cheap­est fu­els in the re­gion, the price in­creases pro­voked protests in that coun­try, so the gov­ern­ment de­cided to lower prices by de­cree and sub­si­dize them. Sub­si­dies cover 59% of the cost of diesel oil and be­tween 37% and 45% of the price of gaso­line. How­ever, these mea­sures have high costs; in Bo­livia, the sub­sidy is ex­pected to reach US$ 1 bil­lion and in Ecuador, around US$ 2,988 mil­lion.

It goes with­out say­ing that fu­els in Venezuela have been highly sub­si­dized for many years now, and it com­petes with Libya and Iran as to who has the cheap­est fuel in the world.

Next are the coun­tries that chose to re­duce taxes. Our Brazil­ian neigh­bors en­acted a law to lower the max­i­mum thresh­old of the tax on the cir­cu­la­tion of goods and trans­porta­tion ser­vices (ICMS) to a ceil­ing of 18% in the dif­fer­ent states, and also re­duced fed­eral taxes to zero, which is par­tic­u­larly sen­si­tive, as fed­eral taxes fund so­cial se­cu­rity. Mex­ico, an­other oil pro­ducer, has de­cided to ex­empt 100% of the Spe­cial Tax on Fu­els at peak times (March to Au­gust), which they call a fis­cal stim­u­lus. Cur­rently, this stim­u­lus is main­tained at 100% for diesel, and be­tween 76% and 94% for naph­tha. This mea­sure is es­pe­cially ef­fec­tive when tax rates are high.

Then there are the coun­tries that use a sta­bi­liza­tion fund. Chile has had a fund called the Fuel Price Sta­bi­liza­tion Mech­a­nism (MEPCO) since 2014, whose pur­pose is to main­tain the price of fu­els within a range, which works by ad­just­ing the Spe­cific Fuel Tax, ac­cord­ing to need. When prices are low, the tax rate feeds the fund; when they are high, the price is sub­si­dized with what was pre­vi­ously col­lected. Peru, for its part, has a mech­a­nism called the Fuel Price Sta­bi­liza­tion Fund (FEPC) with rules like the Chilean fund, as does Colom­bia. The cost of these poli­cies would reach some US$ 3 bil­lion for Chile, US$ 8486 mil­lion for Colom­bia and US$ 803 mil­lion for Peru.

What about Ar­gentina? Con­trary to pop­u­lar be­lief, there is no spe­cific fuel sub­sidy in Ar­gentina. How­ever, as an oil-pro­duc­ing coun­try and thanks to its con­trol of Yacimien­tos Petrolíferos Fed­erales (YPF), it sells crude oil at low prices, which puts down­ward pres­sure on the prices of re­fined prod­ucts. Com­pa­nies that can­not ob­tain crude oil from YPF are forced to give up mar­gins, low­er­ing the price, or lose mar­ket share. It also es­tab­lishes caps on fuel prices, thus en­sur­ing that price vari­a­tion does not keep pace with gen­eral in­fla­tion. Uruguay has forced the Na­tional Fuel, Al­co­hol and Port­land Ad­min­is­tra­tion (AN­CAP), which holds the im­port mo­nop­oly and reg­u­lates the mar­ket, to sell fu­els be­low cost. In this way it has man­aged to avoid a fur­ther jump in the price, which is al­ready the high­est in the re­gion. The cost for Uruguay, un­til May 2022, is a deficit for the com­pany of US$148 mil­lion (con­sider that the to­tal for 2021 was US$159 mil­lion).

Contrary to what some experts say, the price of oil is not transferred instantaneously to the cost of fuel. The latter operates with a certain lag since it first needs to be refined to obtain the derivatives, so neither the rise nor the fall in prices should have a rapid impact on the international price of fuels.

Fi­nally, Paraguay, as we know, re­duced the tax base for the de­ter­mi­na­tion of the Se­lec­tive Con­sump­tion Tax (ISC) on fu­els and achieved a min­i­mum in­ci­dence of taxes on the price of fu­els. In ad­di­tion, it im­ple­mented a fuel sub­sidy scheme for three weeks, which it had to give in due to pres­sure from the busi­ness as­so­ci­a­tions. This scheme, which sub­si­dized diesel type 3 and 93 oc­tane naph­tha, cost 8.9 mil­lion dol­lars and lasted about 17 days.

In gen­eral, all gov­ern­ments have taken mea­sures to mit­i­gate fuel price in­creases de­pend­ing on their fis­cal space and fi­nanc­ing ca­pac­ity. Paraguay, with nar­row mar­gins in both, has not in­ter­vened like other coun­tries. The gov­ern­ments’ de­ci­sion is since these prices af­fect not only in­di­vid­ual con­sumers, but also in­dus­tries, busi­nesses and a large part of their value chain, mak­ing in­ter­ven­tion im­per­a­tive to avoid worse con­se­quences and, of course, so­cial up­heavals.

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