Does the 20-cent discount on fuel serve any purpose?

In recent months, and especially after the invasion of Ukraine, the prices of hydrocarbons in Spain (and in much of Europe) have been increasing. And this increase has a negative direct effect for any economy: inflation.

In this context, several European countries have implemented intervention measures in these markets in order (apparently and intentionally) to reduce the final prices paid by consumers: the fixing of maximum prices in Slovenia, for example; tax reductions in Ireland or Belgium, or subsidies, as in the case of Spain.

At the end of March 2022, the Spanish Government announced that a temporary measure would come into force from April 1 (which it has already announced that it would be willing to extend until autumn), consisting of a reduction of 20 cents per liter in the final price of hydrocarbons at service stations.

But the measure brought an important nuance: the stations belonging to companies with refining capacity in Spain (Repsol, Cepsa and BP), and which are also the ones with the greatest presence in the country, should deduct 5 cents while the State would contribute the other 15 For the other stations, the discount would be fully covered by public funds (20 cents).

We have analyzed the effects that the different measures adopted by European governments have had on the prices of diesel and 95 octane gasoline in Europe. And, among them, the changes in Spain. Let’s look at this specific case.

The data and empirical strategy

We have worked with a panel of data of the weekly average prices for Europe of gasoline 95 and diesel, both before and after taxes, for 19 weeks of 2022: from the first week of January to the second week of May. In addition, the data of the average weekly price of a barrel of Brent crude oil, expressed in euros (after applying the exchange rate), have been analysed.

In order to be able to assess the effects of government intervention on hydrocarbon prices, information is needed not only on how the variable of interest (in this case, prices) has behaved in the affected group (Spain), but also on another group not affected by the policy, the control group.

Fortunately for our analysis, several European countries did not implement any policy in the period studied (Austria, Bulgaria, Denmark, Estonia, Finland, Latvia, Lithuania, Romania, Slovakia and Sweden), making up their average hydrocarbon prices the control group .

Our objective has been to observe how prices have behaved in Spain after the policy applied by the Government, with respect to those countries in which no policy has been applied. The question is: what prices would hydrocarbons have had in Spain if the policy had not been applied?

The results

The results of our estimates are clear: average prices increased in Spain by approximately 5 cents on average. Gasoline 95 increased by 2.7 euro cents before taxes and 3.7 after taxes. Diesel increased even more, reaching 4.1 and 6 euro cents before and after taxes, respectively.

As a technical matter, we want to highlight that Spain and the countries of the control group had a similar behavior before the application of the policy and, therefore, they are comparable and the results are valid.

The conclusions

There are several lessons that can be drawn from these results. In the first place, they show how, in a market with severe competition problems in all the links of the production chain and inelastic demand, the establishment of a subsidy allows producers to appropriate part of it.

And, secondly, the ineffectiveness of the measure: part of the subsidy is not reflected in lower prices for consumers, who should pay 20 cents less and not 15 cents as is actually happening. In addition, with the double aggravation of the cost it has for the public and environmental sectors by financing and encouraging the generation of polluting emissions.

This article is also signed by:

Jordi Perdiguero Garcia. Professor of Applied Economics, Autonomous University of Barcelona

Jose Manuel Cazorla Artiles. Associate professor. Department of Applied Economic Analysis, University of Las Palmas de Gran Canaria

This article has been published in The Conversation