Maximum Overdrive: A Look at Government’s Plans to Liberalise Retail Fuel Prices
Government’s decision to liberalise retail fuel prices at the pump has generated a great deal of public discussion. However, this decision has been anticipated. In last year’s budget statement, the Minister of Finance, signalled Government’s intention to privatise gas stations and fully phase out the fuel subsidy. It is therefore important to fully examine the available details of the Government's proposed liberalisation plan and also reflect on the history of the fuel subsidy in Trinidad and Tobago. This brief will outline the proposed changes to the fuel subsidy mechanism outlined in the Finance Bill 2021 and explore some of the economic considerations for the country as well as potential safeguards to consumers.
How Does the Current Fuel Subsidy Model Work?
First, a bit of history. The petroleum fuel subsidy was implemented in 1974 to cushion the burden of high oil prices on consumers and was seen as a way to share newfound oil wealth with citizens. In the 1974 model, Petrotrin (then Trintoc) provided fuel to the distributors (NP) at a wholesale price which was lower than international selling prices. The distributors, NP (and later UNIPET), would sell to dealers at the Government regulated (subsidised) prices, which included a fixed margin. Dealers at the gas stations would then sell to the public at the fixed pump price. The difference between the wholesale price from Petrotrin and the international price was the subsidy value. This subsidy is refunded to Petrotrin by the Government (see Figure 1).
The burden of the subsidy was shared by the Government and oil and gas exploration and production (E&P) companies. Under the Petroleum Levy and Subsidy Act, E&P companies that produce in excess of 3,500 barrels of oil per day are required to pay a levy equivalent to 4% of their gross income. Thus, the Government’s share of the subsidy was the amount in excess of the 4% cap.
Figure 1: The historical model of how the petroleum subsidy worked
Figure 2: The new fuel model proposed in the Finance Bill 2021
How Will the Proposed New Model Work?
In the proposed model, Paria Fuel Trading Company will continue to purchase fuels at current international prices. The company would then add its margin, terminalling fees, distribution and other costs to determine its wholesale price to marketing companies (Unipet and NP). Unipet and NP, as marketing companies, would purchase fuel from Paria at this wholesale price plus value added tax. The retail prices charged at gas stations would be this wholesale price plus a margin (see Figure 2). Clauses 9 and 10 of the Finance Bill 2021 outline these key features, and the bill states that only marketing companies that purchase fuel from refineries or traders will be allowed to sell to gas stations.
The proposed model will differ from the old model in several ways. Firstly, there will be no fixed retail margin which allows gas stations to price competitively. For the first time prices at the pump will fluctuate in line with international prices. The Ministry of Energy will also publish the wholesale price and international prices which would allow the public to make comparisons between these and the prices at the pump. It is noteworthy that Government will retain the flexibility to maintain the subsidy on certain fuels such as diesel as well as fix the wholesale price. This would allow a measure of control over these prices.
Another difference in the proposed model is the introduction of a fuel levy. This tax is to be paid monthly by any marketing company selling fuels wholesale to gas stations. The levy kicks in once oil prices are below US$65 per barrel. The amount of levy to be paid will fluctuate based on the movement of international oil prices between a US$0-65 range as well as the set wholesale price, the marketers’ margin and the volume of fuel sold by marketers to gas stations.
The proposed model also brings T&T’s fuel market in line with what prevails in other countries, including our CARICOM neighbours Barbados and Jamaica. For instance, in Jamaica, the price at the pump is determined by adding the cost of logistics, financing, foreign exchange, taxes, freight, insurance costs and terminal fees to an international petro-product reference price (US Gulf Coast). All of these costs are converted to Jamaican dollars to determine the price per litre at the pump.
What Are the Fiscal Implications?
According to data from the Ministry of Energy, the fuel subsidy has cost the country approximately TT$23.6 billion over the period 2011-2022. In the past decade, the subsidy value peaked in 2012 at TT$4.45 billion and declined to TT$236 million in 2020. For Q1 2022 the value is 573 million. There are two major reasons for this downturn. Firstly, the Government increased the price of fuel at the pump which resulted in a fall in the subsidy. Secondly, there has been a decline in the international price of oil and petroleum products over the corresponding period. The levy contributions by E&P companies have also declined between 2011 to 2021 from TT$660 million to TT$228 million (see Chart 1).
There are a few fiscal implications associated with the new model. Firstly, Government will retain the petroleum levy paid by E&P companies but also gain revenue from the fuel levy. This levy will be transferred to the Consolidated Fund. This is a new source of tax income that can help boost Government revenue, thereby reducing the fiscal gap between revenue and expenditure. However, if the Government retains the subsidy on some fuels e.g., diesel there will still be a subsidy liability to be financed, albeit a reduced one.
How Will Consumers be Protected?
Given the prevailing economic conditions, a potential rise in fuel prices have prompted concern from the public. Many commentators have expressed fears over the possibility of dealers colluding with the intention to set inflated prices. Minister of Energy Stuart Young has stated that price gouging would not be allowed and noted that discussions are also ongoing with the Petroleum Dealers Association on acceptable margins. However, as stated earlier, the Government will retain the right to place a cap on these margins, through a fixed wholesale price or continuation of a subsidy, and this would limit just how much of a mark up a dealer can add to prices at the pump. Within our current legislative framework, there are also mechanisms to protect consumers. The Consumer Protection and Safety Act and the Fair Trading Act both contain clauses to address business practices and codes of trade associations and to safeguard consumers against the formation of monopolies and price gouging.
Conclusion
Given the importance of transportation costs in the household budget and the long history of the fuel subsidy in T&T, fuel price liberalisation is an issue that will continue to gain attention. The proposed liberalised model will feature many changes for the state, industry and the public. Government revenue used to cover the fuel subsidy can now be redirected towards spending on social goods for example health care and Covid-19 relief.
However, the Minister of Energy also retains the flexibility to maintain specific subsidies if deemed necessary and fix wholesale prices. Petroleum dealers and gas station owners can implement pricing strategies to promote competition and differentiate their offerings to consumers. And, there may also be benefits to consumers including the possibility of paying less at the pump due to falling international oil prices. This proposed new model will likely have long lasting economic and social implications and, given the cyclical nature of global energy price movements, the country must continue to monitor its impacts to ensure that transparency and fairness prevails.
The State of the Extractive Sector Report 2021 provides further information on the subsidy value and petroleum levy payments by oil and gas companies. Visit www.tteiti.com to view the report.
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