Mauricio Medinaceli Monrroy
Private Consultant
Oil - Natural Gas - Energy

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Blog.082

Subsidies to the gasoline, diesel and LPG prices

What is a subsidy? In simple it’s a transfer of resources (usually money) from one group of people to another group of people. It’s not... and I repeat, it’s not, a gift from the president, the congress or some government official. To put things in simple: The Government doesn’t subsidize, the people do.

Let's review some examples of subsidies in our daily life. You and your family live in a nice building and, like everyone else, you must pay the "common expenses". In some co-owners meeting and after a broad discussion, you agree with some per family expense. However, there is a family of two older adults whom just survive with their rents (if any). Therefore, with high probability you and the co-owners will decide that the quota for the older couple should be lower. In this case, the subsidy is from you (and from those who pay the normal quota) to the couple in question.

Another example. You and your friends decide to dine at an expensive (or cheap) restaurant on a Friday night (it also works with Monday). For some strange reason, you decide to divide the bill in equal parts. This generates, at least, two results: 1) the "comelones" (hungry boys) will receive a subsidy from those whom want to "keep the line" and; 2) the average consumption will be higher, this is explained in a very funny way (using Game Theory) in the following video.

Next example. You (the rich one) and your friend (the poor one) win the lottery with a prize of USD 1,000. Because is your friend you (as the "rich man") give your share of the prize to your friend (the poor one). This case is also a subsidy, instead of given money... you stop receiving it.

As you can see, dear reader, a subsidy is not a simple technical instrument used by economists to earn some money. A subsidy is the result of an ethical and moral agreement between a group of people who want to live in peace. A subsidy is a central piece in the redistributive justice discussion in any country.

So why many people beliefs that is the governments that give subsidies? From my point of view, it’s because both the Congress and the Executive Power (president and ministers) design the subsidy mechanisms to "remove" money from some people and "deliver" to others.

With all these ideas in mind, now let me discuss the usual subsidies related to the prices of gasoline, diesel and LPG. I will also show some figures for the Bolivian case.

For purposes of exposure I will classify these subsidies into: Type 1, Type 2 and Type 3.

Type 1 Subsidy

Is the "classic" subsidy. It occurs when the Government defines a consumer price lower than the cost of production (or import), see the following figure. In this sense, the difference between the “costs + a reasonable profit” and the effective sales price, is the subsidy Type 1.

blog.18.04.11.01 

The figures for diesel and LPG in the case of Bolivia are presented below.

blog.18.04.11.02 

As a corollary I present the prices of diesel in Bolivia "with" and "without" the subsidy Type 1 plus the price of this product in USA.

blog.18.04.11.03 

Subsidy Type 2

This subsidy is the difference between international sales prices and domestic prices, as shown in the following figure. In technical language, this subsidy incorporates the opportunity cost. In Bolivia the oil producer’s price sold to the domestic market is well below international prices. This may benefit to the consumers of gasoline, diesel and LPG; However, those people who receive royalties and taxes calculated with this subsidized price may not be very happy. It’s not the same to receive the royalty on a USD/Barrel 25 price than on a USD/Barrel 50 price of.

blog.18.04.11.04 

Now, I present the figures for the Bolivian case.

 blog.18.04.11.05

I also put in your consideration a table that could be called "The lost fiscal evenues", it shows how much money didn’t receive local governments, municipalities, universities and others because the oil in the domestic market was below international prices.

 blog.18.04.11.06

Subsidy Type 3

A third form of subsidy is when the government decides to "lower" the taxes applied to gasoline and diesel to keep "people happy." In Bolivia we lived this in December 2010, during 5 days the Government decided to increase taxes on these products and thus raise final prices to the consumer. After many street demonstrations the increment was canceled, and everything returned to zero point. The following figure presents this type of subsidy.

 blog.18.04.11.07

For the Bolivian case, I present the fiscal revenues losses for Bolivian Government because the lower taxes.

 blog.18.04.11.08

A big hug my dear friends.

Mauricio Medinaceli Monrroy

La Paz, April 4, 2018

 

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In the Blog section I invite you to read: "Natural gas market in Brazil"

 

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