The liter of diesel reached 1.96 euros on average last Saturday, its highest since the conflict broke out in Iran, and gasoline was dangerously close to two euros. However, that same weekend, it came into effect the government’s tax reduction. Prices have dropped, but now the question is how long it will last.
Why has fuel increased? The conflict in the Persian Gulf has increased diesel prices by 44.8 euro cents per liter, and gasoline by 28.2 euro cents, according to a study published by the OCU. The trigger is the war in Iran, which has strained the crude oil markets through the Strait of Hormuzan artery through which nearly 20% of the world’s oil transits. In just three weeks since the start of the conflict, prices at the pumps ended up skyrocketing to levels not seen since the Ukraine crisis.
What has the Government done? The Executive approved on Friday, March 21 a shock package which includes, among its most important measures, lowering the VAT on fuel from 21% to 10% and temporarily eliminating the special tax on hydrocarbons. The estimated savings were around 30 cents per liter, which represents around 20 euros of savings per tank, according to the estimates of the Government itself. The measure published in the BOE on Saturday it came into force immediately, although it will have to be validated in Congress this Thursday.
The Government has set the validity of this temporary reduction until June 30, at which time it will review the impact of the measure depending on how the energy markets evolve.
How much have prices really dropped? This Monday, March 23, the average price of 95 gasoline in Spain was located at 1,595 euros per liter and diesel at 1,786 euros. The drop is real and significant. And in fact, if you go to almost any gas station, you will see that the prices have nothing to do with those of a few days ago.
However, it is worth putting it in perspective. And the average price of a liter of diesel on March 19 was 1,917 euros, and the VAT reduction reduces it by about 17.4 cents. That is still well below the average increase of 45 cents that we were able to verify between March 2 and 19. Likewise, the tax decrease does not fully compensate for what fuel prices have increased in recent weeks.
ANDl rocket and feather effect. The fact that VAT drops on paper does not guarantee that the price at the pump will drop just as quickly or completely. Economists call this the rocket and feather effect: When the price of oil rises, fuels immediately reflect that increase, while the declines are much slower. Part of this slowness also has an explanation: the cut in the hydrocarbon tax has not yet been applied to all gas stations because many are depleting the stock they had bought with the previous tax.
ANDthe first day of the descent. In about 42% of service stations the VAT reduction from 21% to 10% did not fully materialize the first day, and the situation was even worse in agricultural and transport cooperatives, which in most cases had not yet passed on the discount. Some have attributed this to the lack of time to adapt the computer systems (the announcement came on Friday, the publication in the BOE on Saturday and the reduction was to be effective on Sunday) since many stations had purchased fuel at higher prices just the day before.
The director of the Spanish Confederation of Service Station Employers (CEEES), Nacho Rabadán, has indicated that in many cases there have been service station managers who the day before purchased fuel with a price increase greater than the impact of the VAT cut.
And a quarter of gas stations took the opportunity to go up. The most striking thing comes from FACUA. And it is that according to the data According to the consumer organization, 1,837 gas stations that communicated new prices to the Ministry on Sunday took advantage of the VAT reduction to apply a new increase. Of them, 177 completely absorbed the tax reduction by maintaining their prices without adjustment, and another 40 even increased it compared to the previous price.
In the specific case of diesel, FACUA calculates that, if the tax reduction had been fully transferred, the decrease would have reached 17.8 cents, placing the average price at 1.785 euros; However, the real price was somewhat higher. FACUA concludes that lowering taxes without setting price ceilings is “exactly the measure that speculators have been demanding.”
2022 is not that far away. We have the most recent precedent in the bonus of 20 cents per liter that the Government applied during the Ukraine crisis. This cost us around 4.25 billion euros, according to a study of the economists Juan Luis Jiménez, Jordi Perdiguero and José Manuel Cazorla-Artiles. The effectiveness of the bonus was, to say the least, questionable. And in addition to the study, other independent reports from Esade and Funcas They also concluded that a significant portion of that aid did not reach consumers.
The CNMC began an investigation that concluded last February with a fine of 20.5 million euros to Repsol group companies for abusing their dominant position. This history is precisely the reason why the Government has opted this time for a direct tax reduction that acts on taxes instead of repeating the universal bonus. From the CEEES, Rabadán had already qualified the 2022 bonus as “well-intentioned, but poorly designed and worse executed.”
What a difference the measurement makes this time. Unlike the 2022 bonus, the VAT reduction acts directly on the tax included in the final price, which theoretically makes it more difficult for gas stations to appropriate the benefit. However, given FACUA’s complaint after the events of the first day of the sale, we see that the fact that it is more difficult for the price to be absorbed does not mean that it is not impossible.
Given the risk of speculation, the president of the CNMC, Cani Fernández, has pointed out that the organization monitors the fuel prices of more than 12,000 gas stations in real time to detect possible abuses, and the Government spokesperson, Elma Saiz, has warned that the Government will continue to monitor the situation.
And now what. If the price of crude oil continues to rise due to instability in the Middle East, gas stations will not need to actively “steal” the reduction, the market will simply swallow it in a few days.
FACUA now warns that the next increases in fuel prices could completely absorb the approved reductions. “The first week the rise was spectacular, and that gasoline was made with oil that was not at all above the prices it had when the war started, it was much cheaper,” counted to COPE Enrique García, spokesperson for the OCU. The drop that we see today at the pumps is real, but whether it continues will depend on the conflict in the Middle East, and at the moment things are not very clear.
Cover image | Erik Mclean and Jose Garcia
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