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The pricing of transport fuels
The pricing of transport fuels
Joy Dunkerley and Irving Hoch In any comparative study, data availability and comparability invariably pose problems. The data used here are from the US Department of Energy, Energy Information Agency's International Energy Annual which ~jves price data for 25 developing countries and a wide range of industrial countries for 1965 and then each year from 1970 to 1982.1 Pump prices are given for a gallon of premium and regular gasoline, and in mor,z recent years, for auto diesel, in the capital cities of these countries for 31 July and 31 January of each year, expressed in US cents per gallon at current exchange rates. A se~zond source of price data used here is the World Bank's Energy Transit,!on in Developing Countries which gives pump prices for 1981 only 2 in US dollars per gallon for premium gasoline, and diesel, for 54 developing countries including 23 covered in the International Energy Annual. A comparison of the two series for those countries included in both shows them to be reasonably consistent. There are obvious shortcomings with these data. Prices observed at limited time periods and specific locations may not be typical of prices Keywords: Energy pricing; Transport; Dol- over the year as a whole, throughout the country. The prices given here may b,z official, controlled prices rather than the prices at which lar exchange rate purcha:~es are actually made. At the time of writing, the authors were with Of particular importance in a comparative analysis, the conversion of Resources for the Future, 1755 Massachusetts Avenue, Washington, DC, local currencies to dollars at market or official rates of exchange rather 20036. than purchasing power parities 3 distorts inter-country comparison. This article draws on a study, Transport Unfortunately, prices of transport fuels in purchasing power parity Energy: Determinants and Policy by Joy terms are not available for a wide range of countries, but it is clear from Dunkerley and Irving Hoch, with Caroline the limited evidence available that the use of market rates of exchange Bouhdili, which was carried out at Resources for the Future, Washington, DC rather than purchasing power parities to compare fuel prices among with support from the US Agency for countries significantly underestimates the difference in prices between International Development, Office of Ener- developing and industrial countries. gy as part of their Energy Policy DevelopThis is illustrated by examples drawn from countries of the European ment and Conservation project. The authors are grateful to the Office of Energy Community for which prices of premium gasoline and other fuels are for this support and to Napier Collyns, given in both European Currency Units (ECU) and on a purchasing Edward Krapels and David Pearce for helpful comments on an earlier draft. The power standard. 4 Taking prices expressed in ECU before taxes (to avoid the distortion introduced by differential tax rates) there is relatively authors are, however, solely responsible for the views expressed in this article. The small variation in prices among community members. The same prices authors also wish to express their appreciation to Angela Blake for preparing the expres:~ed on a purchasing power standard show much greater variation, with prices in the poorer member countries increasing sharply in manuscript. relatioa to prices in the richer members. In ECU terms, for example,
There is now widespread agreement on the need for correct pricing as a necessary, if not sufficient, condition for securing optimal efficiency in road transport energy use. Despite this wide measure of agreement and the fact that road transport is invariably the largest single market for liquid fuels, empirical work on transport energy pricing has so far been largely confined to the industrial countries. This paper is a contribution to filling the gap by examining within a comparative framework the structure of transport energy pricing in both developing and industrial countries. The advantage of the comparative approach is that it throws light on characteristics of energy pricing which may be obscured if the analysis is limited to the pricing regimee of a group of broadly homogeneous countries.
0301-4215/86/040307-11503.00 (~ 1986 Butterworth & Co (Publishers) Ltd
307
The pricing of transport rue&
prices of premium gasoline before taxes in Italy are 2% higher than in FR Germany. In purchasing power standard terms they are 27% higher. The same holds true for Greece whose prices are 10% higher than FR Germany's in ECU but 50% higher in purchasing power. This reasoning can be extended to the more extreme income ranges encountered in a global study. For example, the cost of a gallon of regular gasoline in the USA in 1975 was 60 cents and in India about two and a half times higher at $1.60, if market exchange rates are used to convert the rupee price to dollars. However, if the purchasing power of the currencies were taken into account the Indian price would be much higher, say between $3 and $4 a gallon. These considerations imply that price elasticities based on price data converted at market exchange rates will tend to be overestimates.
Comparisons across countries
1Road transport typically accounts for 80% or more of total consumption of transport fuels. Although other fuels are used in road transport (alcohol fuels and LPG) the present study is limited to gasoline and automotive diesel which account in most countries for virtually all road transport consumption. Empirical work on transport energy pricing has been largely confined to industrial countries, a recent exception is 'Petroleum prices in developing countries' by Edward N. Krapels, paper presented at the Oak Ridge National Laboratory Seminar on Energy Policy Research, Oak Ridge, TN, USA, 14 June 1985. ZMost of the prices are for the third quarter of 1981 but several apply to other periods between 1980 and 1982. 3purchasing power parities equate the real purchasing power of each country's currency. For many countries they differ significantly from market exchange rates which are derived from the internationally traded component of national output only. 4See Bulletin of Energy Prices, #1-84, Commission of the European Communities, Brussels, 1984.
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Despite these deficiencies, the existing body of price data for 1981 (reproduced in the Appendix) is adequate to throw considerable light on the structure of energy prices among countries and trends over time. Beginning with the structure of gasoline and automotive diesel price across countries, the first thing to notice is that there is a wide range of prices for both gasoline and diesel, even though they are highly standardized products. For premium gasoline, prices range from just over 30 cents a gallon (in Trinidad and Tobago and Venezuela) to over $5.00 (in South Korea and Uganda). For diesel, prices range from around 10 cents a gallon (Venezuela and Egypt) to over $3.00 (in Burundi and Uganda). Again, it should be remembered that these prices are derived using market rates of exchange. The range would be much greater if purchasing power parities had been used. Second, countries are not distributed evenly throughout this wide range, but are clustered around three distinct levels which in Tables 1 and 2 are labelled 'Low, Medium and High'. For premium gasoline, for example, low prices are defined as those under $1.60 a gallon. Although there is a considerable range of prices in this category, this group of countries is quite distinct from the next group of countries (with medium price levels) whose prices are concentrated in the $2.10 to $2.60 a gallon range. In the third group of countries with high prices, prices are typically near $3.00 and over. A similar pattern of concentration applies to diesel prices, though at generally lower levels. Thus in the low price group prices are well under $1 per gallon, medium prices are concentrated in the $1.20 to $1.70 level, and high prices are well in excess of $2.00. Third, differences in price levels of transport fuels are not closely related to level of income and development. Poor, middle-income and rich countries appear in each category for both premium gasoline and diesel. There are two main reasons for these variations in price levels among countries - differences in tax treatment of transport fuels and differences in prices of crude oil on the domestic market. A third factor, of importance to a limited number of countries, is exceptionally high internal transport and distribution costs, which are largely responsible for high prices in landlocked countries such as Malawi and Zambia. For most of the countries, however, variations in tax policies and crude oil costs are the major source of variation.
ENERGY
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The pricing of transportfuels Table 1. Premium gasoline: selected countries ranked by price level (US$ at 1981 prices and exchange rates). Low (under $1.60 a gallon) Developin!|
Industrial and Saudi Arabia
Argentina Bolivia Burma Colombia Ecuador Egypt Indonesia
156 140 42 96 80 71 33
Mexico Nigeria Peru Trinidad and Tobago Venezuela
110 128 110
Medium ($1.61 to $2.80) Developin!~l Bangladesh Cameroon Chile Dominican Republic El Salvador Honduras India Jamaica Kenya Morocco Pakistan Panama Philippines
207 240 207 257 256 208 253 217 274 275 216 226 250
Singapore South Africa Thailand Turkey Greece Ethiopia Guatemala Malaysia Nicaragua Sierra Leone Sri Lanka Sudan Yugoslavia
191 223 214 174 237 266 290 213 272 238 200 230 286
300 450 394 307 365 582 317 299
Uruguay Zambia Paraguay Rwanda Senegal Tanzania Uganda Zimbabwe
417 432 451 283 302 437 544 312
Source: The Energy Transition in Developing Countries, World Bank, Washington, DC, 1983, and International Energy Annual, 1980 and 1981, US Department of Energy, Washington, DC, September 1981 and 1982.
126 136 24
35 31
Industrial
High (over $2.81) Developing Brazil Burundi Ghana Israel Ivory Coast Republic of Korea Malawi Portugal
Canada USA Saudi Arabia
Australia Belgium Japan Netherlands Switzerland Sweden UK
183 280 272 258 249 266 265
Industrial Denmark Finland France Italy
289 288 299 284
Taxation policy
5The original rationale for taxing gasoline was that demand for gasoline was price inelastic such that an increase in price did not lead to a marked fall in consumption thus protecting total revenues. In reality it may have been the high-income elasticity which was largely responsible for the steady increase in consumption. 6The data in Tables 3 and 4 should be interpreted with caution as they are subject to a wide margin of error. In principle, they cover both customs and excise taxes. In practice it may not be easy to capture in one figure the multiplicity of taxes imposed, some ad valorem and some specific. While the data in Tables 3 and 4 may not be an entirely reliable indication for any one country in any one year, they are, however, useful in indicating broad differences between groups of countries and as we shall see later in trends over time.
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Gasolir~e has traditionally been subject to excise taxes, imposed originally for revenue-raising purposes rather than conservation. As a taxable commodity gasoline had several advantages: sales of gasoline until recently rose steadily, thus ensuring an increasing tax revenue, 5 and, as private motoring was confined in many countries to the relatively affluent, excise taxes on gasoline did not raise politically sensitive issues of social equity. Now of course all this has changed. Car ownerslhip has become widespread and as a result in most countries it has become politically difficult to raise gasoline taxes. Gasoline taxation is widespread, even in those countries where pump prices are quite low. As Table 3 shows, 6 there is a considerable range in tax rates for premium gasoline, from under 20% to over 60% of the pump price. Most countries, however, fall into the 30 to 50% range. In the majority of countries therefore, whether developing or industrial, taxes accounted for between one third and one half of the pump price of regular gasoline in 1981. As the pump price varies widely taxes expressed as a share of the total can be lnisleading. The 30% tax of a country with $3.00 gasoline ($1.00) is highcr than the 70% tax of countries with $1.00 gasoline (70 cents). Table 3 therefore also gives the amount of tax in cents per gallon. Again this varies widely from under 20 cents in the USA, Bolivia, Venezuela, to well over $1.50 (in Portugal and France). As might be expected, the tax per gallon tends to be lower in low-price countries. 309
The pricing of transport fuels Table 2. Automotive diesel: selected countries ranked by price level (US$ at 1981 prices and exchange rates). Low (less than $1.00 per US gallon) Developing Argentina Bangladesh Bolivia Burma Colombia Ecuador Egypt Ethiopia
Industrial and Saudi Arabia 60 74 91 30 81 44 14 99
Indonesia Malaysia Mexico Peru Venezuela Trinidad and Tobago Sudan
32 83 16 58 9
146 187 170 115 170 112 103 121 119 126 135 178 153 146 120 145
Pakistan Panama Paraguay Philippines Portugal Senegal Sierra Leone Singapore Spain Sri Lanka Thailand Turkey Uruguay Tanzania
117 133 174 148 134 186
305 273 250 290 275
Uganda Yugoslavia Zambia Zimbabwe
327 241 223 206
Saudi Arabia
8
29 62
Medium ($1.00 to $2.00) Developing Brazil Cameroon Chile Dominican Republic El Salvador Greece Guatemala Honduras India Israel Jamaica Kenya Korea Morocco Nigeria Nicaragua
Industrial
132 123 167 119 133 110 170 183
Australia Belgium Canada Denmark Italy Japan Netherlands Sweden USA
190 191 121 175 126 173 176 134 104
High (over $2.00) Developing Source: The Energy Transition in Developing Countries, World Bank, Washington, DC, 1983, and International Energy Annual, 1980 and 1981, US Department of Energy, Washington, DC, September 1981 and 1982.
Burundi Ghana Ivory Coast Malawi South Africa
Industrial Finland France FR Germany Switzerland UK
200 215 226 243 269
For diesel, tax rates vary from 0 to about 50% of pump prices, translating into taxes of between 0 and $1.40 a gallon (Table 4). There is a particularly marked contrast between the developing and industrial countries. In the developing countries taxes on diesel are on average lower (about 17 cents a gallon) than in the industrial countries (an average of 67 cents). It is not easy to generalize about the reasons behind different tax rates. History, fiscal needs and the structure of revenues have all played a part. In recent years balance-of-payments problems and security concerns have played a larger role. For example, in 1981 virtually all of the countries in the high-price and therefore high-tax category were totally dependent on imports for their oil supplies and therefore more likely to be concerned about both the cost of imports and the vulnerability of their economies to disruption. Their high tax rates reflect this concern. The distinctly lower tax rates on diesel in developing countries is due to diesel's strategic role in agriculture and freight transport, as well as equity considerations, such as keeping bus costs down to benefit low-income workers with long journeys to and from work. 7Note, however, that within this overall constraint there can be considerable variation in the structure of petroleum product prices. Thus a tax on gasoline can offset a subsidy to kerosene, or diesel.
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Crude oil pricing policies Differences in pump prices are also due to differences in pricing policies for crude oil. Countries which import all petroleum supplies have in the end little choice but to pass on the full costs to consumers. 7 In countries
ENERGY POLICY August 1986
The pricing of transport fuels Table 3. Premium gasoline prices and taxes, 1981 selected countries (US cents per US gallon 1981 price.,; and exchange rates).
Country
Pump price of premium gasoline
Taxes
Price before tax
Tax as share of pump price (percentage)
Developinq Bolivia
140
16
124
11
Brazil Colombia Greece India Jamaica Kenya Mexico Pakistan Peru Philippines Portugal Singapore Spain Thailand Venezuela
252 96 237 253 217 274 110 216 110 250 299 191 284 214 31
99 72 95 106 79 120 67 68 40 121 185 66 97 125 13
t 53 24 142 147 138 154 43 148 70 129 114 125 187 89 18
39 75 40 42 36 44 61 31 36 48 62 35 34 58 42
280 126 289 299 288 243 272 258 266 249 265 136 24
146 34 149 164 95 111 99 127 121 111 136 13 -
134 92 140 135 193 132 173 131 145 138 129 123 24
52 27 52 55 33 47 36 49 45 45 51 10 -
Industrial
Source: The Energy Transition in Developing Countries, World Bank, Washington, DC, 1983, and International Energy Annual, 1980 and 1981, US Department of Energy, Washington, DC, September 1981 and 1982.
Belgium Canada Denmark France Finland FR Germany Japan Netherlands Sweden Switzerland UK USA Saudi Aral:ia
which have domestic production, however, supplies to domestic refiners are frecuently provided at lower than international prices. Thus, for gasoline, all the countries in the low price category are oil producers. Nine out of a total of 15 are net exporters, and five are virtually self sufficient. The USA is the only country in the low category which imports a significant share of its petroleum supplies. Within the low price category there is a marked tendency for prices to be lower in the producer-exporter countries than in the self-sufficient or importing country. While all (except the USA) of the countries in the low category are self sufficient in petroleum and most are exporters, not all self sufficient or exporting countries are in the low category. Malaysia, Tunisia, Camerc,on and the UK, for example all have medium gasoline prices in excess of $2.00 a gallon. The reason for this departure from the practice of other exporting countries is that these countries are recent producers whose supplies came on stream when international prices had already risen, and whose domestic pricing policies were rooted in the era of oil import dependency. It was therefore easier for these countries to base domestic pricing of crude on the new higher prices than for countries where prices of domestic crude had been traditionally set by low domestic production costs. A rough illustration of differences in domestic pricing policies for crude oil is provided in Table 3 where premium gasoline prices before taxes are given for a number of countries. In principle these represent the cost of crude oil plus refinery and distribution margins. As the border price of imported gasoline in 1981 was about $1 a gallon, the
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The pricing of transport fuels
pre-tax price including costs of distribution within the country would be expected to be substantially above that level. This is borne out by the table. However, there are several countries (Colombia, Mexico, Peru, Venezuela, Saudi Arabia), all either net exporters or self sufficient in petroleum, in which pre-tax prices are well below international levels, due to domestic pricing policies. Such policies confer an economic if not necessarily a financial subsidy on consumers. There is a similar pattern in the pricing of diesel fuels. For most of the oil-importing countries, pre-tax prices are in line with border prices of about $1 (Table 4). However, in countries which are self sufficient or net exporters, pre-tax prices are well below the international level - 16 cents in Mexico, 9 in Venezuela, and 8 in Saudi Arabia. The total difference in pump prices of gasoline and diesel between low- and high-price countries is due therefore to both difference in prices before taxes (reflecting lower domestic crude oil prices) and different tax rates. The relative weight will vary from country to country but the data in Tables 3 and 4 suggest that on average tax rates and crude prices each account for about one half of the total difference.
Gasoline and diesel prices compared A comparison of Tables 3 and 4 indicates that diesel prices are invariably lower than gasoline. This differential is related to the different markets for the two fuels. Traditionally gasoline has been used for private passenger transport, and diesel in mass transit, and freight Table 4. Automotive diesel prices and taxes, 1981 (US cents per US gallon in 1981 prices and exchange rates),
Country
Pump price of diesel
Taxes
Price before tax
Tax as share of pump price (percentage)
Developing Bolivia Brazil Colombia Dominican Republic Greece India Jamaica Kenya Mexico Pakistan Peru Philippines Portugal Singapore Spain Thailand Turkey Venezuela
91 146 81
10 31 42
81 115 39
11 21 52
115 112 119 135 178 16 117 58 148 134 121 167 133 110 9
0 6 20 14 34 0 10 16 22 30 11 33 28 6 0
115 106 99 121 144 16 107 42 126 104 110 134 105 104 9
0 5 17 10 19 0 9 28 15 22 9 20 21 5 0
191 121 175 215 200 226 126 173 176 132 234 269 8
77 32 52 95 57 105 22 45 57 22 114 137 0
114 89 123 120 143 121 104 128 119 110 120 132 8
40 26 30 44 29 46 17 26 32 17 49 51 0
Industrial
Source: The Energy Transition in Developing Countries, World Bank, Washington, DC, 1983, and International Energy Annual, 1980 and 1981, US Department of Energy, Washington, DC, September 1981 and 1982.
312
Belgium Canada Denmark France Finland FR Germany Italy Japan Netherlands Sweden Switzerland UK Saudi Arabia
ENERGY POLICY August 1986
The pricing of transportfuels transport in agriculture and industry. Governments, especially in developing countries, have kept tax rates lower on diesel in order to favour these markets. The differential between diesel and gasoline prices varies from countr2~ to country. A fairly typical range in 1981 was for gasoline prices to be some 50 to 100% higher than diesel but there are examples of gasoline prices being three times higher or more. When the gap between the two grows too wide the purpose of the differential is defeated as the cheaper diesel fuel is substituted for gasoline. There is evidence that this substitution took place on a significant scale in many developing countries in the 1970s. To quote one well documented example: in Brazil, gasoline was priced in 1970 at 21 (1981) cruzeiros per litre or 17% higher in price than diesel. By the end of the 1970s, the real price of gasoline had more than tripled to 71 cruzeiros while the price of diesel doubled. Consequently, gasoline was 130% higher than diesel. This relative, cheapening of the price of diesel led to a rapid switch from gasoline to diesel trucks. In 1970, 45% of new truck registrations were gasoline powered. By 1979 this share fell to 3% when diesel vehicles accounted for 45% of the commercial vehicle fleet (including buses) compa3ed with 27% in 1970. 8 At first sight the substitution of diesel for gasoline might seem an advantageous development leading to an overall improved fuel efficiency of the transport fleet. Most countries however have found that the benefits from higher efficiencies - not as high as originally thought - to be more than offset by other disadvantages. These include the high foreig~ exchange cost of diesel car imports, the increase in car ownership or premature scrapping following the switch to the new diesel technology, the aggravation of refinery balance, and the failure to recover road use costs. 9 These considerations have imposed constraints on governments' ability to manipulate the prices of transport fuels, and have led in some cases to the imposition of strict import barriers on imports of diesel automobiles.
Trends in prices of road transport fuels The role of taxes and crude oil prices in defining differences in levels of road transport fuel prices across countries is also important in analysing trends in prices over time. Before 1973 (Table 5), in most countries, real gasoline prices declined, due to the fall in the price of crude oil which took place in the 1960s. From 1973, however, this trend was reversed, with significant increa~,;es in gasoline prices in almost all countries (Table 5). There are notable exceptions, such as prices in some major exporters (for aRichardo Paes de Barros and Silverio example, Saudi Arabia) but in the majority of cases, including Soares Ferriera, Un Modelo Econometrico producing countries, there was a substantial increase. The increase in para a Demanda de Gasolina pelos Automoveis de Passeio; Armando Casterlar gasoline prices from 1973 to 1982 varied from country to country, but it Pinheiro, Sobra a dieselizacao de Frota was much higher in developing countries than in the industrial Brasileira de Caminhoes, both Working Papers of Instituto de Planejamento Eco- countries. In the developing countries, for example, gasoline prices nomico e Social, Rio de Janeiro, 1982 and doubled on average from 1973 to 1982. In the industrial countries on the 1983. other hand, gasoline prices over the same period rose by under 50%. 9For similar experiences in Costa Rica see Although these are substantial increases, especially as they mark a Joy Dunkerley and William Ramsay, Analysis of Energy Prospects and Prob- reversal of the historical trend, they are modest compared with the more lems of Developing Countries, Resources than fourfold increase in the real price of crude oil which took place for the Future, Washington, DC, 1983, and during those years. The reason behind this muted increase in pump the energy assessment reports underprices, and the different experiences of the developing and industrial taken by the World Bank. ENERGY
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The pricing of transport Ji~els Table 5. Trends in pump prices of gasoline in selected countries (1965, 1973 and 1982, 1965 = 100). 1973
1982
Percentage change 1965-73 1973-82
101 86 108
214 197 169
+1 - 14 +8
+112 + 129 + 56
76 81 131 84 64 79 84
183 168 237 324 360 174 276
+24 - 19 +31 - 16 - 44 -21 - 16
+ 141 + 107 +81 +286 + 469 + 120 + 229
97 67 57 91
125 137 82 102
- 3 33 43 -9
+ 29 + 104 +44 + 12
73
23
27
-32
110 95 101 78 89 110
130 108 150 95 135 109
+10 - 5 +1 -22 -11 +10
+18 + 14 +49 +22 +52 0
Low-income developing countries India Kenya Pakistan
Middle-income developing countries Colombia Jamaica Morocco Peru Philippines Thailand Turkey
High-income developing countries Greece Mexico Portugal Venezuela
High-income oil exporters Saudi Arabia
Industrial
Source: Data in current US$ from International Energy Annual, Department of Energy, Washington, DC, various issues, converted into local currencies at current exchange rates and deflated by country consumer price index.
1°The example is given in constant 1981 dollars which is assumed for this period, before the major appreciation of the dollar in terms of other currencies, to be a rough p r o x y for real prices.
Canada France Italy Japan UK USA
countries lies in variations in tax rates. The higher the tax, the smaller the increase in the final price resulting from higher crude prices. In countries with high taxes, crude represents a relatively small part of the pump prices so that even a large increase in crude oil prices has quite a limited impact on the final price. The impact of higher crude oil prices and differential tax rates on pump prices of gasoline in oil-importing developing and industrial countries is illustrated in Table 6. The examples given in this table are hypothetical, but reasonably consistent with data presented in the previous tables. ~o In this example, it is assumed that both developing and industrial countries pay the same international price for crude oil and that refining Table 6. Hypothetical example of effect of rise in crude oil prices on gasoline prices (in 1981 US$).
1973 $ per gallon
percentage share
1981 $ per gallon
percentage share
Oil-importing developing countries Crude oil Refining and distribution costs Tax Pump price
0,26
21
1.04
42
0.45 0.54 1.25
36 43 100
0.45 1.01 2.50
18 40 100
0.26
14
1.04
39
0.45 1.20 1.91
24 62 100
0.45 1.21 2.70
17 44 100
Industrial countries Crude oil Refining and distribution costs Tax Pump price
314
ENERGY POLICY August 1986
The pricing of transport fuels
and distribution margins are also similar. The difference in pump prices between the two groups of countries is therefore due solely to taxes which were significantly higher in 1973 in the industrial countries compared with the developing countries. According to our hypothetical example, the subsequent oil price increase of 1973/74 and 1979/80 raises the price of crude to both groups of coumries fourfold. Refinery and distribution margins remain very similar. Taxes are assumed on the basis of scattered evidence to rise substantially in real terms in the developing countries and remain more or less constant in the industrial countries. This example illustrates a number of points. •
• •
11This is at first sight surprising in terms of our previous analysis given that tax rates on diesel are much lower than taxes on gasoline which should logically lead to a higher rather than lower pump price increase. The reason for this unexpectedly slow rate of growth is widespread policy decisions to limit the increase in price of diesel as a strategic development input. The data in Table 6 support this reasoning. In many cases prices before tax are lower than they would be if the full cost of diesel imports plus distribution costs were included.
In both sets of countries the increase in pump prices between 1973 and 1981, 100 and 40%, are substantially below the fourfold increase in crude oil prices, due mainly to the large tax element in pump prices. The rise is greater in the developing countries where the share of taxes in the base year was lower. The composition of gasoline prices has changed radically. The share of crude rose sharply, while the share of refining and distribution cosls and taxes fell, despite significant increases in taxes in many oil-i mporting countries.
Due to lack of data it has not been possible to trace trends in diesel prices over time as in Table 6. However, from the experience of the industrial countries and from analysis similar to that in Table 6 they are assumed to have risen in the developing countries by about 40 to 50% in real terms from 1973 to 1982 - a much lower rate of increase than the rise in gasoline prices.Ll The rise in price of road transport fuels as a group (including both gasoline and diesel) for the developing countries was therefore lower than the rise in the price of gasoline alone. In the poorest developing countries where diesel may account for 70% of total transport fuels, the increase in the index of prices of all transport fuels between about 1973 and 1981 could be about 65%. In the middle- and high-income developing countries, where the weight of gasoline in the total rises, the increase could be between 75 and 85%. This compares with about 40% in the industrial countries where gasoline is by far the major transport fuel. In short, the rise in prices of transport fuels though substantial by historical standards, was relatively small compared with the increase in crude oil prices. For the developing countries, the flow-through ratio (the increase in pump prices compared with crude prices) was between 15 and 20%, and for industrial countries it was 10%.
Table 7. l~nnual average increase in transport fuels (percentage). Annual average increase a
aThese estimates implicitly assume that prices remained constant between 1981 and 1985. This is not an altogether unreasonable assumption as the decline in the dollar price of oil which took place in those years was roughly compensated by the depreciation of many countries' currency in terms of the dollar. The projections assume again implicitly that there will be no major changes in exchange rates over the period.
ENERGY POLICY August 1986
Oil-importing developing countries
Gasoline Diesel Average of road transport :uels
Oil-importing industrial countries -
1973-81
1985-2000
1973-81
1985-2000
9.1 5.2
0.8-2.4 1.5-3.9
4.4 5.5
0.7-1.9 0.9-2,4
7.2
1.2-3.2
4.5
0.7-2.0
315
The pricing of transportfuels Projections of road transport fuels prices
121n the case of diesel in the developing countries an assumed subsidy in 1985 prices is assumed in the low tax case to continue in real terms to 2000. In the high tax case this subsidy is eliminated by 2000. 13j. Dunkerley and I. Hoch,Transport Energy: Determinants and Policy, Resources for the Future, Washington, DC, 1983. For developing countries the income elasticity for road transport fuel was about 1.3 and the price elasticity -0.2.
316
These conclusions give some guidance to the likely trend of road transport fuel prices in the future. As in the past, the course of crude oil prices and tax rates will be the major determinants. There are many views of future developments in crude oil prices over the next 15 years but they appeared until recently to coalesce around two scenarios. One is that dollar oil prices will decline in real terms from 1985 to 1990, stay constant in real terms from 1990 to 1995, and increase in real terms (say an average of 7% a year) from 1995 to 2000. The other view is that crude oil prices will stay constant in dollar terms from 1985 to 1990, and then increase in real terms (by about say 5% a year) from 1990 to 2000. This translates into an annual average increase in dollar crude oil prices ranging between 1.7 and 3.3% annually compared with about 20% annually between 1973 and 1981. The recent slump in crude oil prices suggest that the lower estimate is more probable and may even so be on the high side. The other scenario is retained, however, to illustrate the point that increases of this magnitude will have only a small impact on pump prices. Changes in tax rates could alter this trend. Two cases are considered. In the first, tax rates are held constant in real terms at the 1981 level (which would entail significant increases in nominal terms). In the second, taxes are increased in real terms so that they remain a constant share of pump prices. 12 The results appear in Table 7. The lower end of the range for the 1985-2000 period represents the low crude oil price assumption and the constant real taxes case. The high represents the high crude oil assumption and higher real taxes. It should be emphasized that these projections, particularly those for diesel, are very rough in nature and based on scanty basic data. The main purpose is to illustrate that the rate of increase in prices of transport fuels in future is likely to be much lower than in the past, even assuming strenuous efforts to raise taxes. For the developing countries, for example, the rate of increase could be in the order of 1.2 to 3.2% annually to 2000 compared with over 7% annually from 1973-1982. For the industrial countries the rate could be 0.7 to 2.0% compared with 4.5% in the 1970s. Price increases of this magnitude may not be sufficient to secure desired levels of transport energy conservation, especially in developing countries where the increase in transport fuel consumption in the 1970s was extremely rapid notwithstanding the substantial rise in price of transport fuels during this period. A recent study indicates high income elasticities for both road transport fuels and vehicles and a low price elasticity for transport fuels. 13 These results combined with the modest price rises in transport fuels envisaged over the next 15 years suggest that consumption of transport fuels will continue to rise rapidly, outstripping the increase in economic activity, and that the price effect will not be sufficient to moderate this trend significantly. In these circumstances, additional actions to increase the efficiency of the vehicle fleet, and to improve alternatives to private passenger transport will be needed.
ENERGY
POLICY August 1986
The pricing of transport fuels
Appendix Prices of premium gasoline and automotive diesel in selected countries in 1981 (US cents per US gallon) Country
Premium gasoline
Automotive diesel
Developing countries Argentina Bangladesh Bolivia Burma Brazil Burundi Cameroon Chile Colombia Dominican Republic Ecuador Egypt El Salvador Ethiopia Ghana Greece Guatemala Honduras India Indonesia Israel Ivory Coast Jamaica Kenya Republic of Korea Malawi Malaysia Mexico Morocco Nicaragua Nigeria Pakistan Panama Paraguay Peru Philippines
Country
Premium gasoline
Automotive diesel
Developing countries 156 207 140 42 300 450 240 207 96 257 80 71 256 236 394 237 200 208 253 133 307 365 217 274 582 317 213 110 275 272 128 218 226 451 110 250
60 74 91 30 148 305 187 170 81 115 44 14 170 99 273 112 103 121 119 32 126 250 135 178 153 290 83 16 146 145 120 117 133 174 58 148
Portugal Rwanda Senegal Sierra Leone Singapore South Africa Spain Sri Lanka Sudan Tanzania Thailand Trinidad and Tobago Turkey Uganda Uruguay Venezuela Yugoslavia Zambia Zimbabwe Industrial countries a
299 283 302 238 191 223 284 200 230 437 214 35 174 544 417 31 286 432 312
134 271 186 132 123 222 167 119 62 183 133 29 110 327 170 9 241 223 206
Australia Belgium Canada Denmark Finland Francea FR Germany a Italy Japan Netherlands Switzerland Sweden UK USA Saudi Arabia
183 280 128 289 288 299 243 284 272 258 249 266 265 136 24
190 191 121 t 75 200 215 226 126 172 176 234 134 269 104 8
aAII data for July 1981, except for those countries marked which were for January 1981.
Source: The Energy Transition in Developing Countries, World Bank, Washington, DC, 1983, and International Energy Annual, 1980 and 1981, US Department of Energy, Washington, DC, September 1981 and 1982.
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317
Joy Dunkerley and Irving Hoch In any comparative study, data availability and comparability invariably pose problems. The data used here are from the US Department of Energy, Energy Information Agency's International Energy Annual which ~jves price data for 25 developing countries and a wide range of industrial countries for 1965 and then each year from 1970 to 1982.1 Pump prices are given for a gallon of premium and regular gasoline, and in mor,z recent years, for auto diesel, in the capital cities of these countries for 31 July and 31 January of each year, expressed in US cents per gallon at current exchange rates. A se~zond source of price data used here is the World Bank's Energy Transit,!on in Developing Countries which gives pump prices for 1981 only 2 in US dollars per gallon for premium gasoline, and diesel, for 54 developing countries including 23 covered in the International Energy Annual. A comparison of the two series for those countries included in both shows them to be reasonably consistent. There are obvious shortcomings with these data. Prices observed at limited time periods and specific locations may not be typical of prices Keywords: Energy pricing; Transport; Dol- over the year as a whole, throughout the country. The prices given here may b,z official, controlled prices rather than the prices at which lar exchange rate purcha:~es are actually made. At the time of writing, the authors were with Of particular importance in a comparative analysis, the conversion of Resources for the Future, 1755 Massachusetts Avenue, Washington, DC, local currencies to dollars at market or official rates of exchange rather 20036. than purchasing power parities 3 distorts inter-country comparison. This article draws on a study, Transport Unfortunately, prices of transport fuels in purchasing power parity Energy: Determinants and Policy by Joy terms are not available for a wide range of countries, but it is clear from Dunkerley and Irving Hoch, with Caroline the limited evidence available that the use of market rates of exchange Bouhdili, which was carried out at Resources for the Future, Washington, DC rather than purchasing power parities to compare fuel prices among with support from the US Agency for countries significantly underestimates the difference in prices between International Development, Office of Ener- developing and industrial countries. gy as part of their Energy Policy DevelopThis is illustrated by examples drawn from countries of the European ment and Conservation project. The authors are grateful to the Office of Energy Community for which prices of premium gasoline and other fuels are for this support and to Napier Collyns, given in both European Currency Units (ECU) and on a purchasing Edward Krapels and David Pearce for helpful comments on an earlier draft. The power standard. 4 Taking prices expressed in ECU before taxes (to avoid the distortion introduced by differential tax rates) there is relatively authors are, however, solely responsible for the views expressed in this article. The small variation in prices among community members. The same prices authors also wish to express their appreciation to Angela Blake for preparing the expres:~ed on a purchasing power standard show much greater variation, with prices in the poorer member countries increasing sharply in manuscript. relatioa to prices in the richer members. In ECU terms, for example,
There is now widespread agreement on the need for correct pricing as a necessary, if not sufficient, condition for securing optimal efficiency in road transport energy use. Despite this wide measure of agreement and the fact that road transport is invariably the largest single market for liquid fuels, empirical work on transport energy pricing has so far been largely confined to the industrial countries. This paper is a contribution to filling the gap by examining within a comparative framework the structure of transport energy pricing in both developing and industrial countries. The advantage of the comparative approach is that it throws light on characteristics of energy pricing which may be obscured if the analysis is limited to the pricing regimee of a group of broadly homogeneous countries.
0301-4215/86/040307-11503.00 (~ 1986 Butterworth & Co (Publishers) Ltd
307
The pricing of transport rue&
prices of premium gasoline before taxes in Italy are 2% higher than in FR Germany. In purchasing power standard terms they are 27% higher. The same holds true for Greece whose prices are 10% higher than FR Germany's in ECU but 50% higher in purchasing power. This reasoning can be extended to the more extreme income ranges encountered in a global study. For example, the cost of a gallon of regular gasoline in the USA in 1975 was 60 cents and in India about two and a half times higher at $1.60, if market exchange rates are used to convert the rupee price to dollars. However, if the purchasing power of the currencies were taken into account the Indian price would be much higher, say between $3 and $4 a gallon. These considerations imply that price elasticities based on price data converted at market exchange rates will tend to be overestimates.
Comparisons across countries
1Road transport typically accounts for 80% or more of total consumption of transport fuels. Although other fuels are used in road transport (alcohol fuels and LPG) the present study is limited to gasoline and automotive diesel which account in most countries for virtually all road transport consumption. Empirical work on transport energy pricing has been largely confined to industrial countries, a recent exception is 'Petroleum prices in developing countries' by Edward N. Krapels, paper presented at the Oak Ridge National Laboratory Seminar on Energy Policy Research, Oak Ridge, TN, USA, 14 June 1985. ZMost of the prices are for the third quarter of 1981 but several apply to other periods between 1980 and 1982. 3purchasing power parities equate the real purchasing power of each country's currency. For many countries they differ significantly from market exchange rates which are derived from the internationally traded component of national output only. 4See Bulletin of Energy Prices, #1-84, Commission of the European Communities, Brussels, 1984.
308
Despite these deficiencies, the existing body of price data for 1981 (reproduced in the Appendix) is adequate to throw considerable light on the structure of energy prices among countries and trends over time. Beginning with the structure of gasoline and automotive diesel price across countries, the first thing to notice is that there is a wide range of prices for both gasoline and diesel, even though they are highly standardized products. For premium gasoline, prices range from just over 30 cents a gallon (in Trinidad and Tobago and Venezuela) to over $5.00 (in South Korea and Uganda). For diesel, prices range from around 10 cents a gallon (Venezuela and Egypt) to over $3.00 (in Burundi and Uganda). Again, it should be remembered that these prices are derived using market rates of exchange. The range would be much greater if purchasing power parities had been used. Second, countries are not distributed evenly throughout this wide range, but are clustered around three distinct levels which in Tables 1 and 2 are labelled 'Low, Medium and High'. For premium gasoline, for example, low prices are defined as those under $1.60 a gallon. Although there is a considerable range of prices in this category, this group of countries is quite distinct from the next group of countries (with medium price levels) whose prices are concentrated in the $2.10 to $2.60 a gallon range. In the third group of countries with high prices, prices are typically near $3.00 and over. A similar pattern of concentration applies to diesel prices, though at generally lower levels. Thus in the low price group prices are well under $1 per gallon, medium prices are concentrated in the $1.20 to $1.70 level, and high prices are well in excess of $2.00. Third, differences in price levels of transport fuels are not closely related to level of income and development. Poor, middle-income and rich countries appear in each category for both premium gasoline and diesel. There are two main reasons for these variations in price levels among countries - differences in tax treatment of transport fuels and differences in prices of crude oil on the domestic market. A third factor, of importance to a limited number of countries, is exceptionally high internal transport and distribution costs, which are largely responsible for high prices in landlocked countries such as Malawi and Zambia. For most of the countries, however, variations in tax policies and crude oil costs are the major source of variation.
ENERGY
POLICY August 1986
The pricing of transportfuels Table 1. Premium gasoline: selected countries ranked by price level (US$ at 1981 prices and exchange rates). Low (under $1.60 a gallon) Developin!|
Industrial and Saudi Arabia
Argentina Bolivia Burma Colombia Ecuador Egypt Indonesia
156 140 42 96 80 71 33
Mexico Nigeria Peru Trinidad and Tobago Venezuela
110 128 110
Medium ($1.61 to $2.80) Developin!~l Bangladesh Cameroon Chile Dominican Republic El Salvador Honduras India Jamaica Kenya Morocco Pakistan Panama Philippines
207 240 207 257 256 208 253 217 274 275 216 226 250
Singapore South Africa Thailand Turkey Greece Ethiopia Guatemala Malaysia Nicaragua Sierra Leone Sri Lanka Sudan Yugoslavia
191 223 214 174 237 266 290 213 272 238 200 230 286
300 450 394 307 365 582 317 299
Uruguay Zambia Paraguay Rwanda Senegal Tanzania Uganda Zimbabwe
417 432 451 283 302 437 544 312
Source: The Energy Transition in Developing Countries, World Bank, Washington, DC, 1983, and International Energy Annual, 1980 and 1981, US Department of Energy, Washington, DC, September 1981 and 1982.
126 136 24
35 31
Industrial
High (over $2.81) Developing Brazil Burundi Ghana Israel Ivory Coast Republic of Korea Malawi Portugal
Canada USA Saudi Arabia
Australia Belgium Japan Netherlands Switzerland Sweden UK
183 280 272 258 249 266 265
Industrial Denmark Finland France Italy
289 288 299 284
Taxation policy
5The original rationale for taxing gasoline was that demand for gasoline was price inelastic such that an increase in price did not lead to a marked fall in consumption thus protecting total revenues. In reality it may have been the high-income elasticity which was largely responsible for the steady increase in consumption. 6The data in Tables 3 and 4 should be interpreted with caution as they are subject to a wide margin of error. In principle, they cover both customs and excise taxes. In practice it may not be easy to capture in one figure the multiplicity of taxes imposed, some ad valorem and some specific. While the data in Tables 3 and 4 may not be an entirely reliable indication for any one country in any one year, they are, however, useful in indicating broad differences between groups of countries and as we shall see later in trends over time.
ENERGY
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August
1986
Gasolir~e has traditionally been subject to excise taxes, imposed originally for revenue-raising purposes rather than conservation. As a taxable commodity gasoline had several advantages: sales of gasoline until recently rose steadily, thus ensuring an increasing tax revenue, 5 and, as private motoring was confined in many countries to the relatively affluent, excise taxes on gasoline did not raise politically sensitive issues of social equity. Now of course all this has changed. Car ownerslhip has become widespread and as a result in most countries it has become politically difficult to raise gasoline taxes. Gasoline taxation is widespread, even in those countries where pump prices are quite low. As Table 3 shows, 6 there is a considerable range in tax rates for premium gasoline, from under 20% to over 60% of the pump price. Most countries, however, fall into the 30 to 50% range. In the majority of countries therefore, whether developing or industrial, taxes accounted for between one third and one half of the pump price of regular gasoline in 1981. As the pump price varies widely taxes expressed as a share of the total can be lnisleading. The 30% tax of a country with $3.00 gasoline ($1.00) is highcr than the 70% tax of countries with $1.00 gasoline (70 cents). Table 3 therefore also gives the amount of tax in cents per gallon. Again this varies widely from under 20 cents in the USA, Bolivia, Venezuela, to well over $1.50 (in Portugal and France). As might be expected, the tax per gallon tends to be lower in low-price countries. 309
The pricing of transport fuels Table 2. Automotive diesel: selected countries ranked by price level (US$ at 1981 prices and exchange rates). Low (less than $1.00 per US gallon) Developing Argentina Bangladesh Bolivia Burma Colombia Ecuador Egypt Ethiopia
Industrial and Saudi Arabia 60 74 91 30 81 44 14 99
Indonesia Malaysia Mexico Peru Venezuela Trinidad and Tobago Sudan
32 83 16 58 9
146 187 170 115 170 112 103 121 119 126 135 178 153 146 120 145
Pakistan Panama Paraguay Philippines Portugal Senegal Sierra Leone Singapore Spain Sri Lanka Thailand Turkey Uruguay Tanzania
117 133 174 148 134 186
305 273 250 290 275
Uganda Yugoslavia Zambia Zimbabwe
327 241 223 206
Saudi Arabia
8
29 62
Medium ($1.00 to $2.00) Developing Brazil Cameroon Chile Dominican Republic El Salvador Greece Guatemala Honduras India Israel Jamaica Kenya Korea Morocco Nigeria Nicaragua
Industrial
132 123 167 119 133 110 170 183
Australia Belgium Canada Denmark Italy Japan Netherlands Sweden USA
190 191 121 175 126 173 176 134 104
High (over $2.00) Developing Source: The Energy Transition in Developing Countries, World Bank, Washington, DC, 1983, and International Energy Annual, 1980 and 1981, US Department of Energy, Washington, DC, September 1981 and 1982.
Burundi Ghana Ivory Coast Malawi South Africa
Industrial Finland France FR Germany Switzerland UK
200 215 226 243 269
For diesel, tax rates vary from 0 to about 50% of pump prices, translating into taxes of between 0 and $1.40 a gallon (Table 4). There is a particularly marked contrast between the developing and industrial countries. In the developing countries taxes on diesel are on average lower (about 17 cents a gallon) than in the industrial countries (an average of 67 cents). It is not easy to generalize about the reasons behind different tax rates. History, fiscal needs and the structure of revenues have all played a part. In recent years balance-of-payments problems and security concerns have played a larger role. For example, in 1981 virtually all of the countries in the high-price and therefore high-tax category were totally dependent on imports for their oil supplies and therefore more likely to be concerned about both the cost of imports and the vulnerability of their economies to disruption. Their high tax rates reflect this concern. The distinctly lower tax rates on diesel in developing countries is due to diesel's strategic role in agriculture and freight transport, as well as equity considerations, such as keeping bus costs down to benefit low-income workers with long journeys to and from work. 7Note, however, that within this overall constraint there can be considerable variation in the structure of petroleum product prices. Thus a tax on gasoline can offset a subsidy to kerosene, or diesel.
310
Crude oil pricing policies Differences in pump prices are also due to differences in pricing policies for crude oil. Countries which import all petroleum supplies have in the end little choice but to pass on the full costs to consumers. 7 In countries
ENERGY POLICY August 1986
The pricing of transport fuels Table 3. Premium gasoline prices and taxes, 1981 selected countries (US cents per US gallon 1981 price.,; and exchange rates).
Country
Pump price of premium gasoline
Taxes
Price before tax
Tax as share of pump price (percentage)
Developinq Bolivia
140
16
124
11
Brazil Colombia Greece India Jamaica Kenya Mexico Pakistan Peru Philippines Portugal Singapore Spain Thailand Venezuela
252 96 237 253 217 274 110 216 110 250 299 191 284 214 31
99 72 95 106 79 120 67 68 40 121 185 66 97 125 13
t 53 24 142 147 138 154 43 148 70 129 114 125 187 89 18
39 75 40 42 36 44 61 31 36 48 62 35 34 58 42
280 126 289 299 288 243 272 258 266 249 265 136 24
146 34 149 164 95 111 99 127 121 111 136 13 -
134 92 140 135 193 132 173 131 145 138 129 123 24
52 27 52 55 33 47 36 49 45 45 51 10 -
Industrial
Source: The Energy Transition in Developing Countries, World Bank, Washington, DC, 1983, and International Energy Annual, 1980 and 1981, US Department of Energy, Washington, DC, September 1981 and 1982.
Belgium Canada Denmark France Finland FR Germany Japan Netherlands Sweden Switzerland UK USA Saudi Aral:ia
which have domestic production, however, supplies to domestic refiners are frecuently provided at lower than international prices. Thus, for gasoline, all the countries in the low price category are oil producers. Nine out of a total of 15 are net exporters, and five are virtually self sufficient. The USA is the only country in the low category which imports a significant share of its petroleum supplies. Within the low price category there is a marked tendency for prices to be lower in the producer-exporter countries than in the self-sufficient or importing country. While all (except the USA) of the countries in the low category are self sufficient in petroleum and most are exporters, not all self sufficient or exporting countries are in the low category. Malaysia, Tunisia, Camerc,on and the UK, for example all have medium gasoline prices in excess of $2.00 a gallon. The reason for this departure from the practice of other exporting countries is that these countries are recent producers whose supplies came on stream when international prices had already risen, and whose domestic pricing policies were rooted in the era of oil import dependency. It was therefore easier for these countries to base domestic pricing of crude on the new higher prices than for countries where prices of domestic crude had been traditionally set by low domestic production costs. A rough illustration of differences in domestic pricing policies for crude oil is provided in Table 3 where premium gasoline prices before taxes are given for a number of countries. In principle these represent the cost of crude oil plus refinery and distribution margins. As the border price of imported gasoline in 1981 was about $1 a gallon, the
ENERGY POLICY August 1986
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The pricing of transport fuels
pre-tax price including costs of distribution within the country would be expected to be substantially above that level. This is borne out by the table. However, there are several countries (Colombia, Mexico, Peru, Venezuela, Saudi Arabia), all either net exporters or self sufficient in petroleum, in which pre-tax prices are well below international levels, due to domestic pricing policies. Such policies confer an economic if not necessarily a financial subsidy on consumers. There is a similar pattern in the pricing of diesel fuels. For most of the oil-importing countries, pre-tax prices are in line with border prices of about $1 (Table 4). However, in countries which are self sufficient or net exporters, pre-tax prices are well below the international level - 16 cents in Mexico, 9 in Venezuela, and 8 in Saudi Arabia. The total difference in pump prices of gasoline and diesel between low- and high-price countries is due therefore to both difference in prices before taxes (reflecting lower domestic crude oil prices) and different tax rates. The relative weight will vary from country to country but the data in Tables 3 and 4 suggest that on average tax rates and crude prices each account for about one half of the total difference.
Gasoline and diesel prices compared A comparison of Tables 3 and 4 indicates that diesel prices are invariably lower than gasoline. This differential is related to the different markets for the two fuels. Traditionally gasoline has been used for private passenger transport, and diesel in mass transit, and freight Table 4. Automotive diesel prices and taxes, 1981 (US cents per US gallon in 1981 prices and exchange rates),
Country
Pump price of diesel
Taxes
Price before tax
Tax as share of pump price (percentage)
Developing Bolivia Brazil Colombia Dominican Republic Greece India Jamaica Kenya Mexico Pakistan Peru Philippines Portugal Singapore Spain Thailand Turkey Venezuela
91 146 81
10 31 42
81 115 39
11 21 52
115 112 119 135 178 16 117 58 148 134 121 167 133 110 9
0 6 20 14 34 0 10 16 22 30 11 33 28 6 0
115 106 99 121 144 16 107 42 126 104 110 134 105 104 9
0 5 17 10 19 0 9 28 15 22 9 20 21 5 0
191 121 175 215 200 226 126 173 176 132 234 269 8
77 32 52 95 57 105 22 45 57 22 114 137 0
114 89 123 120 143 121 104 128 119 110 120 132 8
40 26 30 44 29 46 17 26 32 17 49 51 0
Industrial
Source: The Energy Transition in Developing Countries, World Bank, Washington, DC, 1983, and International Energy Annual, 1980 and 1981, US Department of Energy, Washington, DC, September 1981 and 1982.
312
Belgium Canada Denmark France Finland FR Germany Italy Japan Netherlands Sweden Switzerland UK Saudi Arabia
ENERGY POLICY August 1986
The pricing of transportfuels transport in agriculture and industry. Governments, especially in developing countries, have kept tax rates lower on diesel in order to favour these markets. The differential between diesel and gasoline prices varies from countr2~ to country. A fairly typical range in 1981 was for gasoline prices to be some 50 to 100% higher than diesel but there are examples of gasoline prices being three times higher or more. When the gap between the two grows too wide the purpose of the differential is defeated as the cheaper diesel fuel is substituted for gasoline. There is evidence that this substitution took place on a significant scale in many developing countries in the 1970s. To quote one well documented example: in Brazil, gasoline was priced in 1970 at 21 (1981) cruzeiros per litre or 17% higher in price than diesel. By the end of the 1970s, the real price of gasoline had more than tripled to 71 cruzeiros while the price of diesel doubled. Consequently, gasoline was 130% higher than diesel. This relative, cheapening of the price of diesel led to a rapid switch from gasoline to diesel trucks. In 1970, 45% of new truck registrations were gasoline powered. By 1979 this share fell to 3% when diesel vehicles accounted for 45% of the commercial vehicle fleet (including buses) compa3ed with 27% in 1970. 8 At first sight the substitution of diesel for gasoline might seem an advantageous development leading to an overall improved fuel efficiency of the transport fleet. Most countries however have found that the benefits from higher efficiencies - not as high as originally thought - to be more than offset by other disadvantages. These include the high foreig~ exchange cost of diesel car imports, the increase in car ownership or premature scrapping following the switch to the new diesel technology, the aggravation of refinery balance, and the failure to recover road use costs. 9 These considerations have imposed constraints on governments' ability to manipulate the prices of transport fuels, and have led in some cases to the imposition of strict import barriers on imports of diesel automobiles.
Trends in prices of road transport fuels The role of taxes and crude oil prices in defining differences in levels of road transport fuel prices across countries is also important in analysing trends in prices over time. Before 1973 (Table 5), in most countries, real gasoline prices declined, due to the fall in the price of crude oil which took place in the 1960s. From 1973, however, this trend was reversed, with significant increa~,;es in gasoline prices in almost all countries (Table 5). There are notable exceptions, such as prices in some major exporters (for aRichardo Paes de Barros and Silverio example, Saudi Arabia) but in the majority of cases, including Soares Ferriera, Un Modelo Econometrico producing countries, there was a substantial increase. The increase in para a Demanda de Gasolina pelos Automoveis de Passeio; Armando Casterlar gasoline prices from 1973 to 1982 varied from country to country, but it Pinheiro, Sobra a dieselizacao de Frota was much higher in developing countries than in the industrial Brasileira de Caminhoes, both Working Papers of Instituto de Planejamento Eco- countries. In the developing countries, for example, gasoline prices nomico e Social, Rio de Janeiro, 1982 and doubled on average from 1973 to 1982. In the industrial countries on the 1983. other hand, gasoline prices over the same period rose by under 50%. 9For similar experiences in Costa Rica see Although these are substantial increases, especially as they mark a Joy Dunkerley and William Ramsay, Analysis of Energy Prospects and Prob- reversal of the historical trend, they are modest compared with the more lems of Developing Countries, Resources than fourfold increase in the real price of crude oil which took place for the Future, Washington, DC, 1983, and during those years. The reason behind this muted increase in pump the energy assessment reports underprices, and the different experiences of the developing and industrial taken by the World Bank. ENERGY
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The pricing of transport Ji~els Table 5. Trends in pump prices of gasoline in selected countries (1965, 1973 and 1982, 1965 = 100). 1973
1982
Percentage change 1965-73 1973-82
101 86 108
214 197 169
+1 - 14 +8
+112 + 129 + 56
76 81 131 84 64 79 84
183 168 237 324 360 174 276
+24 - 19 +31 - 16 - 44 -21 - 16
+ 141 + 107 +81 +286 + 469 + 120 + 229
97 67 57 91
125 137 82 102
- 3 33 43 -9
+ 29 + 104 +44 + 12
73
23
27
-32
110 95 101 78 89 110
130 108 150 95 135 109
+10 - 5 +1 -22 -11 +10
+18 + 14 +49 +22 +52 0
Low-income developing countries India Kenya Pakistan
Middle-income developing countries Colombia Jamaica Morocco Peru Philippines Thailand Turkey
High-income developing countries Greece Mexico Portugal Venezuela
High-income oil exporters Saudi Arabia
Industrial
Source: Data in current US$ from International Energy Annual, Department of Energy, Washington, DC, various issues, converted into local currencies at current exchange rates and deflated by country consumer price index.
1°The example is given in constant 1981 dollars which is assumed for this period, before the major appreciation of the dollar in terms of other currencies, to be a rough p r o x y for real prices.
Canada France Italy Japan UK USA
countries lies in variations in tax rates. The higher the tax, the smaller the increase in the final price resulting from higher crude prices. In countries with high taxes, crude represents a relatively small part of the pump prices so that even a large increase in crude oil prices has quite a limited impact on the final price. The impact of higher crude oil prices and differential tax rates on pump prices of gasoline in oil-importing developing and industrial countries is illustrated in Table 6. The examples given in this table are hypothetical, but reasonably consistent with data presented in the previous tables. ~o In this example, it is assumed that both developing and industrial countries pay the same international price for crude oil and that refining Table 6. Hypothetical example of effect of rise in crude oil prices on gasoline prices (in 1981 US$).
1973 $ per gallon
percentage share
1981 $ per gallon
percentage share
Oil-importing developing countries Crude oil Refining and distribution costs Tax Pump price
0,26
21
1.04
42
0.45 0.54 1.25
36 43 100
0.45 1.01 2.50
18 40 100
0.26
14
1.04
39
0.45 1.20 1.91
24 62 100
0.45 1.21 2.70
17 44 100
Industrial countries Crude oil Refining and distribution costs Tax Pump price
314
ENERGY POLICY August 1986
The pricing of transport fuels
and distribution margins are also similar. The difference in pump prices between the two groups of countries is therefore due solely to taxes which were significantly higher in 1973 in the industrial countries compared with the developing countries. According to our hypothetical example, the subsequent oil price increase of 1973/74 and 1979/80 raises the price of crude to both groups of coumries fourfold. Refinery and distribution margins remain very similar. Taxes are assumed on the basis of scattered evidence to rise substantially in real terms in the developing countries and remain more or less constant in the industrial countries. This example illustrates a number of points. •
• •
11This is at first sight surprising in terms of our previous analysis given that tax rates on diesel are much lower than taxes on gasoline which should logically lead to a higher rather than lower pump price increase. The reason for this unexpectedly slow rate of growth is widespread policy decisions to limit the increase in price of diesel as a strategic development input. The data in Table 6 support this reasoning. In many cases prices before tax are lower than they would be if the full cost of diesel imports plus distribution costs were included.
In both sets of countries the increase in pump prices between 1973 and 1981, 100 and 40%, are substantially below the fourfold increase in crude oil prices, due mainly to the large tax element in pump prices. The rise is greater in the developing countries where the share of taxes in the base year was lower. The composition of gasoline prices has changed radically. The share of crude rose sharply, while the share of refining and distribution cosls and taxes fell, despite significant increases in taxes in many oil-i mporting countries.
Due to lack of data it has not been possible to trace trends in diesel prices over time as in Table 6. However, from the experience of the industrial countries and from analysis similar to that in Table 6 they are assumed to have risen in the developing countries by about 40 to 50% in real terms from 1973 to 1982 - a much lower rate of increase than the rise in gasoline prices.Ll The rise in price of road transport fuels as a group (including both gasoline and diesel) for the developing countries was therefore lower than the rise in the price of gasoline alone. In the poorest developing countries where diesel may account for 70% of total transport fuels, the increase in the index of prices of all transport fuels between about 1973 and 1981 could be about 65%. In the middle- and high-income developing countries, where the weight of gasoline in the total rises, the increase could be between 75 and 85%. This compares with about 40% in the industrial countries where gasoline is by far the major transport fuel. In short, the rise in prices of transport fuels though substantial by historical standards, was relatively small compared with the increase in crude oil prices. For the developing countries, the flow-through ratio (the increase in pump prices compared with crude prices) was between 15 and 20%, and for industrial countries it was 10%.
Table 7. l~nnual average increase in transport fuels (percentage). Annual average increase a
aThese estimates implicitly assume that prices remained constant between 1981 and 1985. This is not an altogether unreasonable assumption as the decline in the dollar price of oil which took place in those years was roughly compensated by the depreciation of many countries' currency in terms of the dollar. The projections assume again implicitly that there will be no major changes in exchange rates over the period.
ENERGY POLICY August 1986
Oil-importing developing countries
Gasoline Diesel Average of road transport :uels
Oil-importing industrial countries -
1973-81
1985-2000
1973-81
1985-2000
9.1 5.2
0.8-2.4 1.5-3.9
4.4 5.5
0.7-1.9 0.9-2,4
7.2
1.2-3.2
4.5
0.7-2.0
315
The pricing of transportfuels Projections of road transport fuels prices
121n the case of diesel in the developing countries an assumed subsidy in 1985 prices is assumed in the low tax case to continue in real terms to 2000. In the high tax case this subsidy is eliminated by 2000. 13j. Dunkerley and I. Hoch,Transport Energy: Determinants and Policy, Resources for the Future, Washington, DC, 1983. For developing countries the income elasticity for road transport fuel was about 1.3 and the price elasticity -0.2.
316
These conclusions give some guidance to the likely trend of road transport fuel prices in the future. As in the past, the course of crude oil prices and tax rates will be the major determinants. There are many views of future developments in crude oil prices over the next 15 years but they appeared until recently to coalesce around two scenarios. One is that dollar oil prices will decline in real terms from 1985 to 1990, stay constant in real terms from 1990 to 1995, and increase in real terms (say an average of 7% a year) from 1995 to 2000. The other view is that crude oil prices will stay constant in dollar terms from 1985 to 1990, and then increase in real terms (by about say 5% a year) from 1990 to 2000. This translates into an annual average increase in dollar crude oil prices ranging between 1.7 and 3.3% annually compared with about 20% annually between 1973 and 1981. The recent slump in crude oil prices suggest that the lower estimate is more probable and may even so be on the high side. The other scenario is retained, however, to illustrate the point that increases of this magnitude will have only a small impact on pump prices. Changes in tax rates could alter this trend. Two cases are considered. In the first, tax rates are held constant in real terms at the 1981 level (which would entail significant increases in nominal terms). In the second, taxes are increased in real terms so that they remain a constant share of pump prices. 12 The results appear in Table 7. The lower end of the range for the 1985-2000 period represents the low crude oil price assumption and the constant real taxes case. The high represents the high crude oil assumption and higher real taxes. It should be emphasized that these projections, particularly those for diesel, are very rough in nature and based on scanty basic data. The main purpose is to illustrate that the rate of increase in prices of transport fuels in future is likely to be much lower than in the past, even assuming strenuous efforts to raise taxes. For the developing countries, for example, the rate of increase could be in the order of 1.2 to 3.2% annually to 2000 compared with over 7% annually from 1973-1982. For the industrial countries the rate could be 0.7 to 2.0% compared with 4.5% in the 1970s. Price increases of this magnitude may not be sufficient to secure desired levels of transport energy conservation, especially in developing countries where the increase in transport fuel consumption in the 1970s was extremely rapid notwithstanding the substantial rise in price of transport fuels during this period. A recent study indicates high income elasticities for both road transport fuels and vehicles and a low price elasticity for transport fuels. 13 These results combined with the modest price rises in transport fuels envisaged over the next 15 years suggest that consumption of transport fuels will continue to rise rapidly, outstripping the increase in economic activity, and that the price effect will not be sufficient to moderate this trend significantly. In these circumstances, additional actions to increase the efficiency of the vehicle fleet, and to improve alternatives to private passenger transport will be needed.
ENERGY
POLICY August 1986
The pricing of transport fuels
Appendix Prices of premium gasoline and automotive diesel in selected countries in 1981 (US cents per US gallon) Country
Premium gasoline
Automotive diesel
Developing countries Argentina Bangladesh Bolivia Burma Brazil Burundi Cameroon Chile Colombia Dominican Republic Ecuador Egypt El Salvador Ethiopia Ghana Greece Guatemala Honduras India Indonesia Israel Ivory Coast Jamaica Kenya Republic of Korea Malawi Malaysia Mexico Morocco Nicaragua Nigeria Pakistan Panama Paraguay Peru Philippines
Country
Premium gasoline
Automotive diesel
Developing countries 156 207 140 42 300 450 240 207 96 257 80 71 256 236 394 237 200 208 253 133 307 365 217 274 582 317 213 110 275 272 128 218 226 451 110 250
60 74 91 30 148 305 187 170 81 115 44 14 170 99 273 112 103 121 119 32 126 250 135 178 153 290 83 16 146 145 120 117 133 174 58 148
Portugal Rwanda Senegal Sierra Leone Singapore South Africa Spain Sri Lanka Sudan Tanzania Thailand Trinidad and Tobago Turkey Uganda Uruguay Venezuela Yugoslavia Zambia Zimbabwe Industrial countries a
299 283 302 238 191 223 284 200 230 437 214 35 174 544 417 31 286 432 312
134 271 186 132 123 222 167 119 62 183 133 29 110 327 170 9 241 223 206
Australia Belgium Canada Denmark Finland Francea FR Germany a Italy Japan Netherlands Switzerland Sweden UK USA Saudi Arabia
183 280 128 289 288 299 243 284 272 258 249 266 265 136 24
190 191 121 t 75 200 215 226 126 172 176 234 134 269 104 8
aAII data for July 1981, except for those countries marked which were for January 1981.
Source: The Energy Transition in Developing Countries, World Bank, Washington, DC, 1983, and International Energy Annual, 1980 and 1981, US Department of Energy, Washington, DC, September 1981 and 1982.
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