Mauricio Medinaceli Monrroy
Private Consultant
Oil - Natural Gas - Energy

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Some international good practices to eliminate the energy price subsidies

The initial question: Why in many countries emerged subsidies? Certainly the answers to this question are varied, but now I want to concentrate on the following one: for many countries, particularly developing countries (the poor ones), it was very difficult to pass the significant and sustained increase of international oil prices to domestic prices, in particular gasoline, LPG and diesel oil prices. This led to an increasingly large gap between international prices and domestic ones.

Nevertheless, not all countries acted equally, those with big pockets and diversified economies, the pass-through (to domestic prices) was not "too much" complex, I mention the words "too much" because even in these countries the productive and service sectors made ​​significant protests. I still remember the overwhelming demonstrations in Spain and problems of US airlines due to higher international oil prices. Moreover, countries with less money but net oil importers also suffered but "they didn't have other option" because they don't produce enough oil at home, even so, when these prices began to rise beyond expected, subsidies began. Finally, countries with little or too much money but net oil exporters (and natural gas) did not increase prices at home, because: they are oil producers and didn't need to import oil or, they are natural gas producers, then, with the profits from exports the subsidized gasoline, diesel oil and LPG prices... you know which country I'm talking about.

Well, that was the past. At the present almost all countries are confident that subsidies should be eliminated and, therefore, it's necessary to increase domestic gasoline , diesel oil and LPG prices. One of the most important reasons is: a subsidized price incentive to use "and abuse" the energy consumption and moreover, discourages production... so the situation becomes unsustainable.

Now comes the reason for the title of this post "Some international good practices to eliminate the energy price subsidies" in order to have a broad experience, I want to share with you some aspects mentioned in a very good book: Energy Subsidy Reform: Lessons and implications by Clements et al. Naturally I'll not try to make a summary in this article, I'll only point some good policies and, actually, invite you to read carefully the text, surely you'll find more and better things that those I mention here.

The study covers 22 countries in the world that decided to eliminate energy prices subsidies. Note the word "energy" because is not only related with oil prices also deals with electricity, natural gas and coal. However, several of the recommendations for these energies can also be applied to gasoline, diesel oil and LPG. The impatient reader will be angry at this point for that I'll detail below what I believe, are the most interesting policies and strategies to eliminate this kind of subsidies.

Communication, when people know the subsidy costs, for example, the public policies that could be financed by eliminating the subsidy... seems to understand that the subsidy eliminations is necessary. Moreover, also the success of the policy depends on how much knows the people about the elimination strategy, deadlines and what long-term goals can be achieved.

Stepping, if the gap between domestic and international prices is large, it's not necessary to eliminate the subsidy once. A phased program over time appears to be the optimal strategy for the subsidy elimination... Bolivia knows a lot about this problem?

Dialogue with important stakeholders, clearly the diesel oil subsidy elimination must be discuss with the trucking industry and in the LPG case with neighborhood groups. What I'm suggesting is that the removal of subsidy should, in some sense, coordinate with stakeholders, so that they know what's coming ahead.

Cash transfers, appears as one of the first mechanisms to compensate the poorest families, countries generally use the bank system (through ATM) to deliver money to the poorest families. However, when these transfers are not possible other programs can increase the support, for example through public transport fares, increase spending on education, improving health programs, etc.

Create automatic price adjustment mechanisms, automatic methodologies to transfer internal prices to domestic ones appears as a good policy. While this has already been tried in Bolivia and serious political and economic problems were faced, now, in the new context of economic wealth could be a good idea to rethink this alternative.

Institutions Independence, often the success of the subsidy elimination depends of the creation of a regulatory authority to control domestic prices of major petroleum products and also regulate the performance of the state oil company.

Finally, for the Bolivian case, for the elimination of gasoline, diesel oil and LPG subsidies I suggest keep in mind that: 1) part of the price increase should be allocated to the producer according to a predetermined methodology , experience of 2010 when all of the increase was allocated to the State (by increasing the Special Tax on Hydrocarbons and Derivatives) and then partially transferred to producers, has a very dangerous discretionary component; 2) an increase in the gasoline price must also be accompanied by an increase in natural gas price for vehicles (CNG); and 3) the National Hydrocarbons Agency, as regulatory body, is the institution called to implement this process.

Mauricio Medinaceli Monrroy

La Paz, January 27th, 2014

 

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