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

00

1

Jan

-20

02

Se

p-2

00

2

Ma

y-2

00

3

Jan

-20

04

Se

p-2

00

4

Ma

y-2

00

5

Jan

-20

06

Se

p-2

00

6

Ma

y-2

00

7

Jan

-20

08

Se

p-2

00

8

Ma

y-2

00

9

Jan

-20

10

Se

p-2

01

0

Ma

y-2

01

1

Jan

-20

12

Se

p-2

01

2

Ma

y-2

01

3

Jan

-20

14

Se

p-2

01

4

Ma

y-2

01

5

Jan

-20

16

Se

p-2

01

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

11

-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

3

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