Expensive gasoline and the politics of love

Petro’s idea to raise the price of petrol was done, as with the tax, after the recommendation of the International Monetary Fund (IMF). In 2019, at the request of Carrasquilla, the Fund prepared a document (Energy Price Reform, Country Report No. 19/344) in which it recommended eliminating the difference in fuel prices in border areas, changing the internal price adjustment method through a belt system and be careful with the value of diesel. And given the possible impacts of the “recommendations” on lower-income households, he suggested expanding welfare programs, an old formula of the World Bank and the IMF that greases their regressive policies with Vaseline. Later, in the medium-term fiscal framework for 2022, Minister Restrepo included the IMF recommendation.

To justify following the line drawn by the previous government, the argument that the rich are the ones who have a car has been revived. There are 17.56 million registered vehicles (RUNT) in the country, of which 10.54 million are motorcycles and 6.44 million are cars, trucks and campers. Half of the cars are pre-2010 models, and in 2021, 97% of motorcycles sold are under 250cc. It is far from reality to say that vehicles are among the rulers. In addition, the listed types of vehicles run 98% on gasoline (UPME), whose owners or users would affect their economy by putting a gallon of fuel at about twenty thousand pesos.

18.5% of the energy consumed in Colombia (UPME) is motor gasoline, 2.143 million gallons in 2021 (Soldicom Fund), the demand of which between 2012 and 2021 has grown by 66%. After declining in 2020, consumption of this fuel increased to 209 million gallons in August, 37% of which was imported. Liquid fuels are a major intermediate good for society. They give energy to mobilize people in everyday life, including economic activity. Agriculture requires gasoline. Also freight, industry, trade in goods and provision of services. Therefore, a $1,000 increase in the price of fuel raises inflation by 0.65% (MinHacienda), because as the producer price index rises, so does the consumer price index.

The importance of gasoline as an energy source extends to the home economy. When a Colombian goes to a gas station and pays $9,445 per gallon, that equates to 15% of the country’s daily per capita income, while a US citizen spends 2.2% of their daily income for the same action. , Japanese 4.1%, English 5.7% and Argentine 13%. Bringing the domestic price of gasoline to what is paid per gallon in the Gulf of Mexico ($18,000-$20,000), even drop by drop, would double what the average Colombian spends today. It will increase from 15% to 30.2% of the average daily income!

To make a ten thousand peso jump in the domestic price of gasoline, the deficit in the Fuel Price Stabilization Fund, FEPC, is used as an argument. The fund began working in 2008 to mitigate the increase in fuel prices initiated by the Pastrana government, when the international price and exchange rate entered the game of the formula. A decision guided by the intention to free the gasoline market and open the way to imports, which today represent more than a third of domestic consumption due to the lack of local production of quality fuels due to the non-modernization of the Barrancabermeja refinery.

The fund, with the exception of 2020, 2009 and 2008, has always operated with a deficit, but if the negative balances are crossed with the transfers of profits from Ecopetrol to the national government, the fiscal balance is positive. Between 2008 and 2021, SOE transfers for profits totaled $107.13 billion, six times the FEPC imbalance (-$20.05 billion). A deficit of between $25 billion and $32 billion is projected for this year, according to various estimates. At the end of the second quarter, Ecopetrol posted a profit of $27.5 billion, a rate that, if maintained, would be equivalent to a portion of oil revenues that continue to be useful in guaranteeing access to energy for the country’s residents.

What is the origin of the Fund’s negative balance? Public policy itself, as the domestic price of gasoline and diesel was pegged to foreign prices, making it dependent on the exchange rate and using the equivalent of 70% of the US gasoline value as a benchmark. However, as historically what has been paid there exceeds what is charged here, the difference must be compensated to the refineries (Ecopetrol), as it is assumed that if not paid in this way, the oil company will export all crude oil production . This formula, resulting from the fuel market liberalization policy, is the reason for the deficit finances in the FEPC.

Could there be another formula? Yes. It is possible that domestic prices depend on the production costs of Ecopetrol, a company where, including the weight of diesel and gasoline imports and transportation and refining costs, the cost of production per unit of production in the second quarter of 2022 was $53.4 per barrel (Ecopetrol). This will make a gallon of gasoline worth US$1.7 at the refinery gate, not US$2.77 as Petro and his cronies want us to pay.

With this formula, the price of gasoline will surely rise gradually to $11,000. Although due to the inflationary effects of this increase, FEPC stabilization mechanisms can be used, even temporarily, to soften or avoid the blow to the pockets of consumers and the operating finances of economic activity. From there, it is possible to make adjustments using the IPC as a reference or index that shows the development of the production costs of the national oil company, which recently increased significantly (between 2021 and the second quarter of 2022, the unit price per barrel increased by 37%). As a result, the management of the fund will become less burdensome on the nation’s finances.

Petro’s idea would also hurt Colombian households, among them Bogotá residents, who make 21 percent of daily trips on motorcycles, cars and other gasoline-powered vehicles. All economic activities in Bogotá, formal and informal, use gasoline vehicles to transport food and other goods and equipment in small quantities. And 99% of daily motorcycle trips in the capital are made by people who live in strata 1, 2, 3 and 4 (Mobility Survey 2019).

If the population is divided into ten parts ‒into deciles‒, it is possible to see the effects of the proposal in relation to the income of the population in each decile. Here’s how a gallon of gasoline equivalent would change in daily income, by each decile:

Decile 1: from 119% to 242%.

Decile 2: from 44% to 89%.

Decile 3: from 30% to 62%.

Decile 4: from 23% to 48%.

Decile 5: from 20% to 40%.

Decile 6: from 16% to 32%.

Decile 7: from 13% to 26%.

Decile 8: from 11% to 22%.

Decile 9: from 9% to 18%.

Decile 10: from 4% to 8%.

Petro’s love for the IMF is costing us.

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