Automatic Fuel Pricing Mechanisms David Coady Division Chief Fiscal Affairs Department International Monetary Fund IEA International Conference on Fossil Fuel Subsidy Reform Paris, October 13, 2016
Automatic Fuel Pricing Mechanisms
David Coady
Division Chief
Fiscal Affairs Department
International Monetary Fund
IEA International Conference on Fossil Fuel Subsidy Reform
Paris, October 13, 2016
Motivation
Increasing volatility of international fuel
prices Click
Incomplete pass-through of international
price changes to domestic consumers Click
Ad hoc approach to pricing susceptible to
recurring energy subsidies
Typically advise adoption of AFPM to ensure
full pass-through and protect fiscal Click
Click to Slide 6 - Objectives of AFPMs 2
Increasing volatility in international oil prices
3
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
160.00
Jan
-19
90
Se
p-1
99
0
Ma
y-1
99
1
Jan
-19
92
Se
p-1
99
2
Ma
y-1
99
3
Jan
-19
94
Se
p-1
99
4
Ma
y-1
99
5
Jan
-19
96
Se
p-1
99
6
Ma
y-1
99
7
Jan
-19
98
Se
p-1
99
8
Ma
y-1
99
9
Jan
-20
00
Se
p-2
00
0
Ma
y-2
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1
Jan
-20
02
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2
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3
Jan
-20
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4
Ma
y-2
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5
Jan
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Se
p-2
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6
Ma
y-2
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7
Jan
-20
08
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Ma
y-2
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9
Jan
-20
10
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p-2
01
0
Ma
y-2
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1
Jan
-20
12
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p-2
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2
Ma
y-2
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3
Jan
-20
14
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p-2
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4
Ma
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5
Jan
-20
16
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6
International Oil Prices (US$/barrel)
Crude Oil
Diesel
Click back to Slide 2
Incomplete pass-through in many countries
Table 1. Median Pass-Through Coefficients by Country Groups and Over Time
Median Pass-Through Coefficients
Jan 2005-Dec 2006
Jan 2007-Jun 2008
Jul 2008-Feb 2009
Mar 2009-Jun 2014
Jul 2014-Dec 2014
Average
Diesel median pass-through
Advanced Economies 143 184 164 164 106 152
Commonwealth of Independent States 221 54 31 48 26 76
Developing Asia 187 78 61 57 47 86
Emerging Europe 150 182 164 167 108 154
Latin America and the Caribbean 119 100 76 92 39 85
Middle East and North Africa 161 33 1 13 0 42
Sub-Saharan Africa 170 108 58 58 39 86
All countries 155 125 93 82 56 102
4 Click back to Slide 2
Fuel subsidy reform & adoption of AFPM
5
Jordan
0
20
40
60
80
100
120
Apr-
05
Jul-05
Oct-
05
Jan-0
6
Apr-
06
Jul-06
Oct-
06
Jan-0
7
Apr-
07
Jul-07
Oct-
07
Jan-0
8
Apr-
08
Jul-08
Oct-
08
Jan-0
9
Apr-
09
Jul-09
Oct-
09
Jan-1
0
Apr-
10
Jul-10
Oct-
10
Jan-1
1
Apr-
11
Jul-11
Oct-
11
Jan-1
2
Apr-
12
Jul-12
Oct-
12
Jan-1
3
Apr-
13
Jul-13
Oct-
13
Jan-1
4
Apr-
14
Jul-14
Oct-
14
Jan-1
5
Apr-
15
Jul-15
Oct-
15
Jan-1
6
Apr-
16
Jul-16
International
AFPM adopted
Jordan Domestic and International Diesel Prices (In US cents per liter)
No pass
through
Source: Jordan Ministry of Energy and Mineral Resources, and the US Energy Information Administration.
Feb-08 Dec-10
Stepped Price
Adjustment
Aug-12
AFPM reinstated
Aug-14
Click back to Slide 2
Objectives of AFPMs
Avoid recurrence of energy subsidies by
ensuring full
Smoothing can be formally incorporated to
reduce domestic fuel price volatility and
avoid sharp price increases while ensuring
full pass-through over medium term
Transferring responsibility to independent
pricing body can depoliticize pricing
Can facilitate transition to liberalized pricing
6
Designing an AFPM
Specify the pricing formula
Adopt a timeline for updating the
components of the pricing formula
Establish a rule determining when and by
how much retail prices are changed
Consider a price smoothing mechanism to
reduce short-term price volatility
7
Gasoline Kerosene Diesel
CIF import price (1) 423 482 440
FOB price 388 447 405
Freight, insurance and fees 35 35 35
Taxes (2) 234 18 147
Custom duty 54 6 33
Excise 75 4 40
VAT 81 8 49
Other fee and charges 25 0 25
Domestic margins and transport (3) 92 65 78
Margins (distribution and retail) 55 26 40
Transport charges and fees 38 39 38
Pump price (LCU per liter) [(1)+(2)+(3)] 750 565 665
Table 1. Fuel Price Structure
LCU per liter
+
+
=
Price bands
Moving averages
• Smoothed variable: retail prices
•Can be for instance 3, 5, or 10 percent
•Excise tax/subsidy component is the adjustor
• Smoothed variable : import prices
• Can be for instance 2, 4, or 6 month moving averages
• Excise tax/subsidy component is the adjustor
Smoothing can reduce price volatility….
10
0
10
20
30
40
50
60
70
80
90Retail Prices Under Alternative Pricing Mechanisms
FPT PB3 MA6
…..but translates into fiscal volatility
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-15
-10
-5
0
5
10
15
20
25
30
35
Aug
-04
Dec-0
4
Apr-
05
Aug
-05
Dec-0
5
Apr-
06
Aug
-06
Dec-0
6
Apr-
07
Aug
-07
Dec-0
7
Apr-
08
Aug
-08
Dec-0
8
Apr-
09
Aug
-09
Dec-0
9
Apr-
10
Aug
-10
Dec-1
0
Apr-
11
Aug
-11
Dec-1
1
Apr-
12
Aug
-12
Dec-1
2
Apr-
13
Aug
-13
Dec-1
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Net Taxes Under Alternative Pricing Mechanisms
FPT PB3 MA6
Can be adopted as part of reform strategy or at end
12
60
62
64
66
68
70
72
74
76
78
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Full pass-through
Price band (3%)
Price band (5%)
Price band (10%)
Transition Strategy
Outline a clear timeline for reaching targeted
fuel tax levels
Prepare in advance for the adoption of the
pricing mechanism as soon as the targeted
tax levels are reached
Consider creating an autonomous committee
responsible for implementing the new
automatic mechanism
Prepare a plan for liberalization of pricing
over the medium term
13
Reform Experience
• Philippines (mid 1990s), South Africa (late 1970s) and
Turkey (early 1990s) transferred implementation to
independent body
• Philippines and Turkey implemented mechanisms as
part of transition to liberalized pricing
• Many others have adopted AFPM more recently
• Jordan (2005); Mauritania (2012); Morocco (2013); Nepal
(2014); Tunisia (2014); UAE (2015)
• Number of countries have adopted mechanisms with
smoothing
• Cote d’Ivoire; Chile, Colombia, Peru, Malawi, Mauritius,
Namibia, Thailand, Vietnam
• India and Malaysia have liberalized fuel prices in 2014
14
AFPM Paper: http://www.imf.org/external/pubs/ft/tnm/2012/tnm1203.pdf
Various tools and resources available on website:
http://www.imf.org/external/np/fad/subsidies/
IMF Working Paper: “How Large Are Global Energy Subsidies?”
IMF Book: “Getting Energy Prices Right: from Principle to Practice”
IMF Book: “Energy Subsidy Reform: Lessons and Implications”
15
IMF resources