Is the 20-cent fuel discount really necessary?

The prices of hydrocarbons have been rising in Spain and other parts of Europe in recent months, especially since the invasion of Ukraine.

Is the 20-cent fuel discount really necessary?

The prices of hydrocarbons have been rising in Spain and other parts of Europe in recent months, especially since the invasion of Ukraine. Inflation is a direct negative effect on any economy.

In this context, many European countries have taken intervention measures on these markets to (apparently, and intentionally) lower the final prices paid by consumers. These include the fixation of maximum prices in Slovenia; tax cuts in Ireland or Belgium or subsidies as in the case with Spain.

The Spanish Government announced at the end of March 2022 that a temporary measure would take effect starting April 1, 2022. It already stated that it was willing to extend the period until autumn. This measure consisted of a 20 cent per liter reduction in hydrocarbons prices at service stations.

The measure did have one important flaw: stations owned by companies with Spanish refining capacity (Repsol Cepsa, BP) should be deducted 5 cents, while the State would pay the remaining 15 cents. For all other stations, the discount will be fully paid for by public funds (20c).

We've analyzed the impact that different European government measures have had on diesel prices and gasoline 95 octane in Europe. And the Spanish changes. Let's take a look at this particular case.

A data panel containing the average weekly price of gasoline 95 in Europe and diesel for the 19 week period 2022 has been used. It covers the period from January 1st to May 2nd. The data for the average weekly price per barrel of Brent crude oil in euros, after applying the exchange rate, were also analyzed.

To assess the impact of government intervention on hydrocarbon prices we need information not only about how the variable (in this instance, prices) behaved in the affected (Spain) but also on the behavior of another group, the control group.

Our analysis revealed that several European countries (Austria and Bulgaria, Estonia, Finland Latvia, Lithuanian, Romania, Slovakia, Sweden, Slovakia, Slovenia, Slovakia, Slovakia, Slovakia, Slovakia, Hungary, Estonia, Finland), did not have any policies during the study period.

We wanted to see how prices behaved in Spain following the Government's policy, and in comparison to other countries that have not had a policy. It is now time to ask: What prices would hydrocarbons have in Spain if this policy hadn't been implemented?

Our estimates show that average prices in Spain increased by about 5 cents per year. The price of gasoline 95 rose by 2.7 euros cents before taxes and 3.0 after taxes. Diesel rose even further, rising to 4.1 and 6 euros cents, before and after taxes.

Technically, we would like to point out that Spain and the countries in the control group had similar behavior prior to the application of this policy. Therefore, the results can be compared and are valid.

These results can teach us many lessons. They show that in a market where there are severe competition issues in every link of the production chain, and an inelastic consumer, producers can take part of the subsidy.

The second is the ineffectiveness and cost of the measure. A portion of the subsidy does not reflect in lower prices for consumers. They should be paying 20 cents more, not 15 cents, as is happening. It also doubles the burden on the public and environment sectors by funding and encouraging the production of polluting gases.

This article has also been signed by:

Jordi Perdiguero Garcia. Professor of Applied Economics at the Autonomous University of Barcelona

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

This article was published in The Conversation