29 influence the design and timing of price reform: (1) the gap between the current and marketbased price levels, (2) the market structure, (3) the subsidy delivery mechanism where there is a price subsidy, and (4) the mechanism for delivering social protection. The rest of this section discusses these four aspects briefly followed by comments on the potential impact of price reform on the quality of service, the role of communication, and the transparency of the pricing policy. Restructuring of the downstream oil sector is beyond the scope of this paper.

# **_Bridging the price gap_**

If current prices are low, they may need to be raised several-fold. Examples include all subsidized fuels in Repúblicana Bolivariana de Venezuela, Egypt, Indonesia, Iran, and Iraq; premix in Ghana; kerosene in Angola, Bolivia, Ghana, India (for household use), and Nigeria; and LPG in Angola, Bolivia, Argentina (LPG for the poor), Morocco, Tunisia, and Panama (LPG for the poor). Implementing very large, one-off price increases is likely to be too disruptive and unlikely to find political acceptance. Large price increases also invite backlashes. A recent example is the price reform in the Islamic Republic of Iran in December 2010, in which fuel prices were at least doubled (for super gasoline) and increased by as much as 21-fold for diesel. That reform was remarkable in that such large price increases were not rolled back. Nevertheless, despite very large handouts to virtually the entire population for compensation at a cost that far exceeded the savings from the price increases, the parliament in 2012 amended the law reforming subsidies, turning future price floors in the law―intended to eliminate subsidies in five years―to price ceilings, thereby effectively entrenching subsidies (albeit smaller than at present).

In these situations, the government needs to decide how long it should take to raise prices to market levels, and how large each price increase should be. This task is obviously made easier if price adjustments are started in times of low world oil prices, as the government of China did in January 2009, when it switched to a new regime requiring more frequent price adjustments based a 22-day running average price of a basket of crudes. Several of the countries above now requiring large price increases had retail prices that were close to market-based price levels in January 2009. Having missed that opportunity, and given that oil prices are unlikely to collapse as spectacularly as they did in 2008 and 2009, governments may consider raising prices in small increments regularly until market levels are reached, as the government of Thailand has begun to do with LPG prices. However, if the starting prices are very low―a cup of coffee in Repúblicana Bolivariana de Venezuela is a hundred times more expensive than a liter of premium gasoline―large initial price increases may be warranted and find political acceptance.

Although rare, there are circumstances when overnight subsidy elimination may be feasible. One such case is a limited price subsidy program targeting only the poor, as with the LPG programs in Argentina and Panama. The Dominican Republic in September 2008 eliminated the LPG price subsidy and replaced it with bonagas cards issued to the poor; cash earmarked for LPG purchase is transferred to bonagas cards as part of social protection. Another scenario where overnight subsidy elimination may make sense is where black market prices have become the de facto end-user prices and are close to what would have been market prices, as with subsidized kerosene in Nigeria. In these situations, it would be informative to conduct price and quantity surveys to identify how much consumers actually purchase and at what price, because the _actual_ quantities purchased and prices paid determine the impact of higher official prices.