Gasoline and Diesel Pricing Reforms in BRIC Countries – A Comparison of Policy and Outcomes

Recent changes in international oil prices have highlighted the issue of petroleum product pricing reforms in a number of non-OECD economies, particularly as the non-OECD now accounts for the bulk of the global growth in consumption of petroleum products. In 2014, oil demand from the non-OECD is predicted to overtake OECD oil demand for the very first time. Of this, four economies – Brazil, Russia, India, and China, the ‘BRIC’ countries – will account for 45 per cent of non-OECD oil demand. The BRIC countries have some common socioeconomic and demographic characteristics, and face similar challenges in domestic energy policy. One significant common policy stance has been associated with petroleum product pricing – specifically, the historical use of price controls, together with efforts to reform these over time. The most interesting feature of this shared policy stance is that it has led to different outcomes in the BRIC economies, particularly in relation to the impacts on downstream investment.

This paper investigates the impacts of gasoline and diesel pricing reforms on downstream investment in the BRICs. Of the BRICs, India and China (the two countries that are the largest net importers of oil) have accounted for the largest downstream investments and expansions in refining capacity. However, these are also the two BRICs where price controls for petroleum products have been largely retained by governments, which have preferred a gradual approach towards the liberalization of prices. In contrast, Brazil and Russia, where petroleum product prices were officially liberalized in the early 1990s and early 2000s, have experienced serious constraints in attracting downstream investments and have struggled to expand (in the case of Brazil) or upgrade (in the case of Russia) their refining capacity. These outcomes run counterintuitive to expectation, according to which liberalization and the alignment of domestic petroleum product prices with international oil prices should be conducive to fostering competition and investment along the entire value chain.

In investigating the reasons for this counterintuitive outcome, an analysis of the ‘pass-through’ of international price movements to domestic prices for gasoline and diesel shows broad evidence of price controls being exercised in Brazil and Russia despite the official liberalization of prices, through implicit or indirect measures, with governments typically influencing domestic pricing through intervention in the operations and capital expenditure plans of the National Oil Companies (NOCs). In contrast, India and China have used explicit or direct measures such as setting prices directly, adjusting federal taxes, and compensating NOCs and marketing/retailing companies, as well as specific consumer groups affected by price changes directly using cash transfers. The findings therefore demonstrate a dichotomy of experience amongst the BRICs. This paper sets out three broad policy lessons – first, that the impacts of price controls generally tend to be concentrated in one part of the value chain, and although governments may view this as ‘manageable’ or ‘containable’ – these impacts have knock-on effects, as shown in this paper. Second, that petroleum product price liberalization is not irreversible – demonstrated by the experiences of Brazil and Russia where price controls were reintroduced implicitly. And third, that there is a need, post-liberalization, for policies and price adjustment mechanisms which are logical and transparent, and which take into account the potentially negative impacts of price controls on downstream capital expenditure.

Executive Summary

By: Bassam Fattouh , Carolina Santos de Oliveira , Anupama Sen

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