Domestic Petroleum Price Smoothing in Developing and Transition Countries

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.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