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# **3. Government Interventions to Influence Prices and Their Consequences**

Many governments in developing countries are inclined to intervene with price-based policies when world oil prices rise appreciably. In order to limit the drain on the government budget, price-based policies may be accompanied by quantity-based policies in the form of rationing subsidized fuels. Indirect measures to influence prices include export restrictions and pressure brought upon oil suppliers. The end results have not always been lower prices enjoyed by consumers or lower vulnerability to oil price increases. These policy responses and their effects are briefly discussed below.

# **3.1 Pricing, tax, and export policies**

A doubling of oil prices since 2005 has led to calls on governments to intervene. Recent oil price surges and collapses have intensified suspicions about “rockets and feathers”—when oil prices rise, retail prices rise quickly like a rocket, but when oil prices fall, retail prices fall slowly like a feather (Bacon and Kojima 2010b)—and prompted some governments to tighten price control or launch investigations into price collusions.

# **_Price control_**

Price freezes for months or even years at a time continue to be common in a large number of countries. Predictably, nearly all have led to price subsidies, some amounting to a few percentage points of GDP. Countries that have frozen prices of gasoline, diesel, or both for several months or longer in the past three years include Angola, Bangladesh, Bolivia, Cameroon, Côte d’Ivoire, Egypt, Ethiopia, Ghana, India, Indonesia, the Islamic Republic of Iran, Iraq, Jordan, Kazakhstan, Madagascar, Malawi, Malaysia, Morocco, Mozambique, Nepal, Niger, Nigeria, the Russian Federation, Rwanda, Sri Lanka, Syria, República Bolivariana de Venezuela, and the Republic of Yemen. Among them, Malawi is rare in that it suspended automatic price adjustments in 2004 but resumed them in June 2012. Jordan also resumed monthly price adjustments in December 2012 after suspending them at the end of 2010.

No price freeze is permanent—although prices in República Bolivariana de Venezuela have not changed since 1999—and when prices are finally adjusted, the increases can be large, as in Bolivia and the Islamic Republic of Iran in December 2010 and Nigeria in January 2012. Such price shocks can invite a backlash. In the face of widespread popular protests, the government of Bolivia reversed the price increases completely after five days. In 2012, the Iranian parliament amended the Targeted Subsidies Reform Act, ratified in March 2010, to limit future price increases by changing one stipulation in the act: the original act required domestic prices to be raised to “no less than 90 percent” of Arab Gulf FOB prices, but this clause was rewritten to read “no more than 90 percent,” thereby turning a floor into a ceiling and effectively entrenching a permanent subsidy (Hassanzadeh 2012a). Nevertheless, among the three countries, the Iranian price increases of December 2010 were the only ones that were not rolled back. Nigeria deregulated the price of gasoline in January 2012, causing retail prices to more than double. Immediately after the price increase, trade unions staged an eight-day strike, estimated to have cost the economy more than US$1 billion (Reuters 2012a). The government backed down and lowered the gasoline price to ₦97 (US$0.61) a liter within two weeks. Despite the partial roll-back of the initial price increase, ₦97 still represented a 49-percent price increase and the price of gasoline in Nigeria is higher than the higher of the two prices of regular gasoline in the Islamic Republic of Iran.