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|**Mechanism**|**Advantages**|**Potentialproblems**|
|---|---|---|
|||the point of making the cost of compliance<br>unacceptably high.|
|Pricing by location|Costs are better reflected.|Consumers in remote areas may compare<br>themselves to those in major cities and feel a<br>sense of injustice. If costs of serving remote<br>areas are too high, some remote areas may not be<br>served.|

_Source_ : Author.

Price ceilings allow price competition. They also give an indication of the degree of competition in the market: if all prices are at the ceiling, there is little evidence of competition, but divergence from the ceiling may be a sign of emerging competition. If price ceilings are set too low, however, not only will all prices be at the ceiling, marketing petroleum products may not even be financially viable. If price ceilings are comfortably high to allow competition but all prices are at the ceiling, inefficient oil companies can continue to operate while efficient ones are not passing efficiency gains to consumers and retaining large profits instead. Setting price levels by definition eliminates scope for price competition. The problem of prices being set too high or too low applies equally to controlling price levels.

Many governments control retail prices, but some control prices at wholesale or exrefinery. In the extreme, where retail prices are controlled, wholesale prices may be higher than retail prices, undermining the financial viability of the retail business. An example is Kazakhstan where wholesale prices, which are not controlled and determined primarily by import prices, have matched or exceeded retail price ceilings set by the government in recent years; in response, the Kazakh oil ministry signed a memorandum with oil companies to limit wholesale prices to a maximum of 87 percent of the maximum retail price in August 2011 ( _Nefte Compass_ 2011). In rare cases, prices are controlled at several points in the supply chain, as in El Salvador, which sets maximum LPG prices at four points along the supply chain every month.

Even when based on clearly defined formulas, computation of controlled prices is not easy. Although free-on-board (FOB) prices relevant to a given market are externally set, import prices contain elements specific to the market and depend on a number of factors that could lead to significant variations for the same FOB price, such as the dates of landing and foreign exchange acquisition. The agency in charge of price control needs to estimate costs of storage and transport, and what would be a reasonable margin along the supply chain. In a deregulated market, profits are not guaranteed, but a cost-plus formula is often structured to assure a profit margin at every stage along the supply chain, at least in theory. All too often, however, whether price ceilings or price levels, they tend to be set too low in times of rising or high oil prices, discouraging market entry and investment in the downstream sector, and sometimes even making compliance with safety, health, environment, and technical standards difficult.

Dozens of governments in this study set uniform prices or price ceilings for at least one petroleum product, among other considerations to give a sense of equity. Freight equalization, however, provides additional scope for inefficiency as well as corruption—including claims of fuel delivery to areas far from import terminals or refineries, when they were actually sold in urban markets near these supply points.

Absent adequate competition, price deregulation may result in high prices paid by consumers. This is one reason some governments adopt a formula-based automatic price adjustment mechanism as an interim step before full deregulation. In small markets, governments