the variation in fuel prices is in most cases as great as that in the basic oil price, or greater; and more so for diesel than for gasoline prices (or in other words, “passthrough” of oil prices to fuel prices is, on average, approximately unity). This is a conclusion somewhat at odds with others in the literature, e g some of the work done in both the World Bank and the IMF; see e g Kojima (2012b).<sup>21</sup>

- A larger surplus from fossil fuel exports leads to lower domestic fuel prices, and higher average fuel subsidies. This effect is stronger for gasoline than for diesel.

- A higher GDP level leads to higher fuel prices and thus fewer subsidies (or more taxes). This effect is particularly significant for gasoline prices, using 2SLS estimation.

- Higher motor fuel consumption leads to lower fuel prices, so that the subsidy rate is higher (the tax rate lower) when more fuel is consumed. This effect however consistently significant only for gasoline. This implies that a high gasoline consumption level leads to pressure for more gasoline subsidies. Note that the identification of such a relationship is meaningful only when instruments are used for fuel consumption (fuel consumption is always negatively correlated to the fuel price via the demand relationship).

- A larger share of public health expenditure in GDP is associated with higher fuel prices, and lower subsidies. This effect is strong and highly significant for both gasoline and diesel. This result indicates that fuel subsidies and public-goods supply (represented by public health expenditures) are alternative, and not complementary, ways for politicians to satisfy their respective (s)electorates. While we expect this result to hold also in more appropriately specified and estimated relationships, we recognize the weakness for this result, that public health expenditure and expenditures on fuel subsidies are both likely to be endogenous variables, in a more completely specified model.

- A larger land area relative to population appears to lead to lower fuel prices, most notably for diesel. This could be due to a tendency for fuel consumption externalities (which are in some countries reflected through fuel taxes) are smaller in countries with more dispersed populations. Significance of this effect is lost in several cases where instrument variables are used, most so for diesel prices.

- Greater openness of the economy leads to lower fuel prices. It is unclear what mainly drives this relationship. One factor could be lower transport costs for oil products in more open economies. Another could be a tax competition effect for in countries that tax motor fuels, holding back taxes in more open economies.

Our underlying theoretical framework, in Strand (2012), stresses that motor fuel subsidies are clearly visible private goods, which act as a mechanism of targeted, albeit somewhat selective, income re-distribution. Within this theoretical line of reasoning we conclude that motor fuel subsidies and public health spending – the latter as a proxy for the ability to provide public goods – seem to correlate negatively (positively) in (non-) democratic

> 21 Average pass-through for the 2009-2012 period was, by Kojima (2012b), measured at about 73% for both gasoline and diesel, for a similar (although not identical) set of countries. Kojima’s time period was however shorter; and the adjustment period assumed (which was approximately one year in our study) was also shorter.

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