Gasoline price subsidies

(September 13, 2016)

The gasoline prices in quite a few countries around the world are substantially below market levels. What are these countries and by how much do they subsidize retail gasoline? To make that calculation, we started by estimating what would gasoline cost if there were no taxes and subsidies, no government regulation of prices, and relatively free, competitive markets. We computed that benchmark using data on the retail prices of gasoline and the level of taxes across U.S. states where these conditions largely apply. The benchmark number is 0.52 USD per liter of unleaded gasoline. We performed the same calculation for all European countries where prices are not regulated and we arrived at a benchmark of 0.51 USD per liter, almost identical with the U.S.

In other words, in ideal circumstances where free markets push prices down to their lowest possible level and in the absence of any taxes, prices would be about 0.51-0.52 USD per liter of gasoline. Any retail price below that level indicates the presence of subsidies. These subsidies could take various forms. For example, the state could mandates a price ceiling or it could provide tax breaks or subsidies to oil producers and refiners that are passed on to the consumer. Whatever the form of the subsidy, however, the bottom line is that the prices of gasoline are below the lowest possible free market level.

Using August 2016 data, we identified 15 countries with subsidized gasoline prices starting from a sample of 160 countries around the world that excludes small island countries and some very small inland countries such as Lichtenstein and Monaco. The subsidy is calculated as the benchmark price of 0.52 USD per liter minus the local retail prices of gasoline. The subsidy ranges from 0.03 USD per liter in Azerbaijan to 0.51 USD per liter in Venezuela. Virtually all of the countries on the list are oil producers and none of them have market-determined retail gasoline prices. On the contrary, all of these countries have a fixed price for retail gasoline that is changed periodically by government decision.

On the second chart we show the USD amount of the subsidy per person in the same countries. To calculate that, we first multiplied the per liter subsidy and the number of liters of gasoline used in each country during the course of one year using data from the U.S. Energy Information Administration. This gives the total USD amount of the subsidy, i.e. how much consumers save by paying below market prices during one year. We then divided that number by the population.

The greatest per capita subsidy is in Kuwait where the benefit for the average citizen from the gasoline subsidy amounts to 316 USD per year. Saudi Arabia and Venezuela come second and third with 261 USD per person and 227 USD per person. Nigeria has the smallest subsidy per person: only 3.49 USD per year.

It is also interesting to note which countries are not on the list. For example, Russia and Mexico, both of which are important oil producers and both heavily subsidize their fossil fuels industry according to data from the International Energy Agency are not included. In other words, although these countries are oil producers and subsidize their oil industries, their citizen do not pay a lower price that what they would pay in a competitive, unregulated market.

In fact, there are many countries in the same situation including Argentina, Indonesia Trinidad and Tobago, and Uzbekistan. Those countries subsidize their fossil fuel industries but their citizens pay more than the competitive benchmark price of gasoline.

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