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Domestic Petroleum Price Smoothing in Developing and Transition Countries

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  • Benedict F. W. Bingham
  • James Daniel
  • Giulio Federico
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    Abstract

    This paper examines the case for government-led smoothing of domestic petroleum prices in the face of volatile international prices. Governments in most developing and transition countries engage in petroleum price smoothing, as the survey of country practice carried out for this paper shows. This paper reviews the potential welfare implications of petroleum price volatility, and assesses different price smoothing rules on the basis of historical oil prices. These simulations reveal the presence of a sharp trade-off between price smoothing and fiscal stability, suggesting that developing and transition country governments should engage in limited price smoothing and, if possible, rely on hedging instruments to do so.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 01/75.

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    Length: 28
    Date of creation: 01 May 2001
    Date of revision:
    Handle: RePEc:imf:imfwpa:01/75

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    Related research

    Keywords: Oil prices; Price stabilization; petroleum prices; petroleum products; spot price; petroleum pricing; oil companies; international oil prices; oil importers; crude oil; price stability; commodity prices; fiscal stability; import price; oil importer; crude oil prices; domestic price; oil-importing countries; domestic prices; demand for petroleum products; import prices; oil price changes; oil products; transition countries; gasoline prices; non-oil commodities; importing countries; million barrels; gasoline price; domestic market; income elasticities; crude prices; competitive market; crude price; oil exporting countries; political economy; oil demand; oil company; exporting countries; spot crude prices; petroleum market; external shocks; domestic industry; neighboring countries; oil import; oil futures; fiscal shock; trade shock; petroleum products prices; economic perspectives; open economies; crude oil price; terms of trade;

    References

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    1. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers, Princeton, Woodrow Wilson School - Public and International Affairs 153, Princeton, Woodrow Wilson School - Public and International Affairs.
    2. Massell, Benton F, 1969. "Price Stabilization and Welfare," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 83(2), pages 284-98, May.
    3. Leon, Javier & Soto, Raimundo, 1995. "Structural breaks and long-run trends in commodity prices," Policy Research Working Paper Series 1406, The World Bank.
    4. Eduardo M.R.A. Engel & Rodrigo Valdés, 2000. "Optimal Fiscal Strategy for Oil Exporting Countries," Documentos de Trabajo, Centro de Economía Aplicada, Universidad de Chile 78, Centro de Economía Aplicada, Universidad de Chile.
    5. Hong Liang & C. John McDermott & Paul Cashin, 1999. "How Persistent Are Shocks to World Commodity Prices?," IMF Working Papers, International Monetary Fund 99/80, International Monetary Fund.
    6. Kletzer, Ken & Newbery, David M & Wright, Brian D, 1992. "Smoothing Primary Exporters' Price Risks: Bonds, Futures, Options and Insurance," Oxford Economic Papers, Oxford University Press, vol. 44(4), pages 641-71, October.
    7. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 6(1), pages 107-132, Winter.
    8. Peter Wickham, 1996. "Volatility of Oil Prices," IMF Working Papers, International Monetary Fund 96/82, International Monetary Fund.
    9. Paul Cashin & C John McDermott & Alasdair Scott, 1999. "Booms and slumps in world commodity prices," Reserve Bank of New Zealand Discussion Paper Series G99/8, Reserve Bank of New Zealand.
    10. Nickell, Stephen, 1985. "Error Correction, Partial Adjustment and All That: An Expository Note," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 47(2), pages 119-29, May.
    11. Paxson, Christina H, 1992. "Using Weather Variability to Estimate the Response of Savings to Transitory Income in Thailand," American Economic Review, American Economic Association, American Economic Association, vol. 82(1), pages 15-33, March.
    12. A. Mazaheri, 1999. "Convenience yield, mean reverting prices, and long memory in the petroleum market," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 9(1), pages 31-50.
    13. Turnovsky, Stephen J & Shalit, Haim & Schmitz, Andrew, 1980. "Consumer's Surplus, Price Instability, and Consumer Welfare," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 135-52, January.
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    Cited by:
    1. Paterson, Anna, 2005. "Understanding Markets in Afghanistan: A Study of the Market for Petroleum Fuels," Case Studies, Afghanistan Research and Evaluation Unit 14634, Afghanistan Research and Evaluation Unit.
    2. Hafedh Bouakez & Nooman Rebei & Désiré Vencatachellum, 2008. "Optimal Pass-Through of Oil Prices in an Economy with Nominal Rigidities," Cahiers de recherche, CIRPEE 0831, CIRPEE.
    3. Arze del Granado, Francisco Javier & Coady, David & Gillingham, Robert, 2012. "The Unequal Benefits of Fuel Subsidies: A Review of Evidence for Developing Countries," World Development, Elsevier, Elsevier, vol. 40(11), pages 2234-2248.
    4. David Coady & Taimur Baig & Joseph Ntamatungiro & Amine Mati, 2007. "Domestic Petroleum Product Prices and Subsidies," IMF Working Papers, International Monetary Fund 07/71, International Monetary Fund.
    5. Daniel Artana, Marcelo Catena y Fernando Navajas & Fernando Navajas & Marcelo Catena, 2007. "El Shock de los Precios del Petróleo en América Central: Implicancias Fiscales y Energéticas," Working Papers 94, FIEL.
    6. José Gallardo & Arturo Vásquez & Luis Bendezú, 2005. "La Problemática de los Precios de los Combustibles," Working Papers, OSINERGMIN, Oficina de Estudios Economicos 11, OSINERGMIN, Oficina de Estudios Economicos.

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