Assessing a fuel subsidy: Dynamic effects on retailer pricing and pass-through to consumers

Abstract

This paper aims to investigate whether fuel retailers strategically increased prices following a subsidy intended to cover a mandatory discount and to assess its impact on transmission to consumers. Introduced by the Spanish government in April 2022 to counter soaring fuel prices resulting from the Ukraine conflict, the impact of this subsidy is analyzed using a nonlinear autoregressive distributed lag-ECM to estimate counterfactual net prices over a three-month period. The analysis shows that the price reaction during the subsidy period differed by fuel type and timing. While evidence of price responses for gasoline is generally lacking, significant responses are estimated for diesel. Gas stations operated by major companies, which received a subsidy covering 80% of the required discount, increased diesel net prices by about 3 cents per liter during the analyzed period. In contrast, stations independent of these companies, whose discount was fully subsidized, raised their prices by approximately 6 cents per liter. The pass-through to diesel consumers at these independent stations has been around 60% on average, falling well below that by the end of the period. Some caution is warranted when implementing this policy measure, given the notably incomplete pass-through revealed in the most important fuel product and the largest group of stations.