This term refers to the extent to which changes in oil prices filter through to changes in retail fuel prices in individual countries. The extent of this effect depends on fuel market regulations in a particular country.

Liberalized markets

In countries with liberalized fuel markets, changes in oil prices have a relatively direct impact on fuel prices. The effect starts in the first week after an oil price change, peaks in the second week, and is usually completed within the third and fourth weeks. The size of the effect depends on the level of excise taxes on fuel. In countries where excise taxes are high, the impact of oil price changes on fuel prices is smaller. The reason is that the excise tax is a fixed amount per liter or gallon of fuel. When excise taxes are high, oil prices account for a smaller share of the overall retail price.

For example, in the United States, where excise fuel taxes are relatively low, a 10% change in the price of oil leads to about a 6-7% change in fuel prices. In contrast, in Europe, e.g. Germany where excise taxes are high, the same 10% change in oil prices typically results in a 3-5% change in the final retail price.

Regulated but flexible markets

However, fully liberalized markets exist in only about one-third of countries worldwide. In another third of countries, fuel prices are set by the government but generally respond to oil price changes. Examples include China, South Africa, Vietnam, and others. In these countries, governments use explicit or implicit formulas to determine fuel prices based on oil prices and exchange rates. Domestic fuel prices are adjusted at regular intervals, usually monthly, and these prices are either fixed for the period or serve as a price ceiling.

In such cases, the effect of oil prices on retail prices often resembles the effect observed in liberalized markets. Even though prices are set administratively, adjustments are relatively frequent and largely complete. As a result, fuel prices behave similarly to those in liberalized markets, and the size of the impact can be significant.

Heavily regulated markets

In the remaining third of countries, prices are also set by governments, but they are not adjusted frequently or fully to reflect changes in oil prices. This group includes many oil-rich countries that provide low and stable domestic fuel prices. It also includes very poor countries where governments cannot allow large energy price shocks and therefore subsidize fuel prices. Many countries in Africa follow such policies. In addition, some countries with strong authoritarian tendencies prioritize maintaining low and stable energy prices, often supported by natural resource revenues, as in Venezuela and Iran.

Further notes

When looking at the world as a whole, an oil price shock first propagates in liberalized countries - generally advanced economies in North America, Europe, and Australia. The impact is then observed in countries with government-set but flexible pricing systems. In those countries, the effect may take longer to materialize but is not necessarily small. In the third group of countries, however, the impact may be limited or delayed.

These patterns hold during periods of both small and large energy price shocks. The main caveat is that when energy prices increase very rapidly and substantially - as they did in 2022 - governments across all three groups tend to intervene to reduce the degree of pass-through.

Note also that the pass-through is essentially the same for gasoline and diesel prices in terms of timing and size of the effect. It also works symmetrically in periods of rising oil prices and declining oil prices.

Every month, we calculate the numerical value of this pass-through for each country on our website. These values are displayed on individual country pages for gasoline and diesel fuel prices in a table below the historical price chart.

Readings

Kpodar, K., & Imam, P. A. (2020). To pass (or not to pass) through international fuel price changes to domestic fuel prices in developing countries: What are the drivers? (IMF Working Paper No. 2020/194). International Monetary Fund.
https://www.imf.org/-/media/files/publications/wp/2020/english/wpiea2020194-print-pdf.pdf

Hankla, C., Rioja, F., & Valev, N. (2023). The political economy of “green” regulation: Evidence from fuel price markets. Comparative Politics, 56(1), 73–94.
https://www.ingentaconnect.com/contentone/cuny/cp/2023/00000056/00000001/art00005