Alternative Retail Pricing for Petroleum Products

Topics: Supply and demand, Inflation, Price elasticity of demand Pages: 42 (12818 words) Published: February 27, 2013
An Alternative Retail Pricing Policy for Petroleum Products: A Case Study of Gasoline and High Speed Diesel in Thailand
Thiraphong Vikitset
School of Development Economics
National Institute of Development Administration
118 Seri Thai Road, Bangkapi District, Bangkok 10240, Thailand E-mail:
This article examines the retail pricing policy of gasoline and high speed diesel in Thailand. The pricing policy of these two products is characterized by cross price subsidy from the gasoline consumers to the high speed diesel consumers. The cross price subsidy leads to welfare losses and increases in economic costs of these two products. An alternative retail price structure of gasoline and high speed diesel which generates the desired amount of revenue and yet minimizes the total welfare losses and lowers their economic costs is proposed in this article.

Keyword: Thailand; pricing policy; gasoline; high speed diesel; welfare; economic cost
JEL: classification code: H20, H21, Z0
The author would like to thank Dr. Vichit Lorchirachoonkul,
Dr. Praipol Kumpsap, and Dr. Yuthana Sretapramote for their
valuable comments.
I. Introduction
Gasoline and high speed diesel are the two major petroleum products that are consumed mainly in the transportation sector in Thailand. Gasoline is sold as gasoline with octane 91 and gasoline with octane 95. The consumption of all gasoline accounts for about 20 percent of the total petroleum products consumption during the period 2002 through 20051. The high speed diesel consumption constitutes between 44 and 47 percent of the total petroleum products consumption in Thailand during the same period. The consumption of gasoline and high speed diesel thus accounts for about 67 percent of the total petroleum products consumption in Thailand.

The wholesale prices of gasoline and high speed diesel have the same following structure
wholesale price = ex-refinery price + excise tax + municipal tax + oil fund 1+ oil fund 2 +energy conservation fund + value added tax
The retail price of each product is then determined by adding the marketing margin and the value added tax to its wholesale price so that retail price = wholesale price + marketing margin + value added tax The economic cost of each product consists of its refining cost, the refining margin of the refiners, its distribution cost, profit of the oil traders, and its externality cost. The ex-refinery price component of the retail price reflects the refining cost and the refining margin, or profit, of the oil refiners. The marketing margin component reflects the distribution cost and profit of the oil traders. At present, there are no retail price components that reflect the externality cost in the existing price structure. The energy conservation fund component in the 1.Estimated from Energy Statistics published by the Energy Policy and Planning Office, Thailand, available from URL 4

retail price structure is collected from the gasoline and high speed diesel consumers to finance the energy conservation projects and does not reflect the externality costs of these two products.
Before the deregulation of oil price in August 1991, the government controls all components of the retail price structure. After 1991, the government no longer controls the ex-refinery price and the marketing margin components. Their rates are allowed to be determined by the ‘market mechanism’.

The excise tax, municipal tax, oil fund 1, oil fund 2, and the value added tax components of the retail price do not reflect the economic costs of gasoline and high speed diesel. These components are merely transfer payment items designed to generate revenue and to control the retail prices.

Even after the oil price deregulation in 1991, the price structure still allows the government to control of the wholesale and retail prices of gasoline and high speed diesel by setting the rates of...
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