Price of ACPM in Colombia will reach $15,200 with government announcement

Not during election season

The statements made by the Minister of Finance, Ricardo Bonilla, when he expressed that the price of ACPM in Colombia “we are not going to touch it in the middle of election day”, generated a stir. With this statement he hinted that behind the decisions on the price of this energy source there is a question of political economy.

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The issues surrounding the formula for calculating the price of ACPM (Motor Fuel Oil) in Colombia include legal, technical and also political parameters and components. But what is the importance of this energy source that is used to move trucks, buses, machinery and generate electricity, and what would be the impacts of equating the national price to the price paid in the Gulf of Mexico in the United States?

The importance of diesel, known in Colombia as ACPM

The name of this energy source is due to the French engineer Rudolf Christian Karl Diesel (1858-1913), who in 1893 presented in society his pressure-ignited thermal engine, which was extended in use to electric and water plants, automobiles and trucks, marine vessels, mines, trains, oil fields, construction, agriculture, factories and transoceanic transportation.

The name of this type of engine was passed on to the petroleum derivative used for its combustion, which today is the basis for moving cargo and passengers within countries, between countries and between continents.

According to data from the Energy Institute, in 2022, the world consumed 28.21 million barrels of diesel per day, 29% of the total global consumption of petroleum distillate fuels, which makes it the fuel with the highest global demand, where the main consumers are the United States (3.9%) and China (3.7%), nations that also have the largest crude oil refining capacity in the world.

According to the International Energy Agency (IEA), 81% of the energy consumption needs of trucks and buses in the world correspond to diesel, 11% to gasoline, 3% to natural gas and 4% to biofuels.

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In the United States, according to ATRI (American Transportation Research Institute), fuel represents 22% of truck transportation operating costs.

In Colombia, according to DANE, fuel accounts for 40.2% of freight transportation costs and 31% of inter-municipal passenger transportation.

Financial expenditure on energy by cargo and passenger transporters depends on technological factors, the efficiency of vehicle fleet consumption -affected by its age- and the energy price policies in each country.

Worldwide, these activities are highly sensitive to changes in diesel prices. In 2022, for example, in Portugal, Spain, Italy, France and Germany, truck drivers mobilized and went on strike due to the increase in fuel prices.

That same year, in Colombia, cargo transporters have expressed their dissatisfaction to the government of President Gustavo Petro for contemplating the possibility of matching the price of ACPM in Colombia to that paid in the United States, a decision that has been in the freezer since October 2022.

Diesel blended with biodiesel is the country’s main industrial product. In 2021, industrial sales of this hydrocarbon reached $17.7 billion, followed by gasoline blended with ethanol, chicken meat, beer and threshed coffee, as can be seen in the following table.

Sales of this energy product are equivalent to 1.5% of GDP and 2.15% of household spending in 2021.

For Ecopetrol, in 2022, ACPM represented a quarter of sales to the domestic market and 3% of the income received from external sales.

In addition, during the 21st century the state-owned company has made billions of dollars in investments in the Cartagena and Barrancabermeja refineries to comply, among other purposes, with legal environmental standards regarding the presence of sulfur (particles per million) in the fuels it sells, especially diesel.

According to data from the environmental and economic account of energy flows (DANE-National Accounts, 2021), for the processes of each of the economic activities, the manufacturing industry has the highest demand for this fuel, 53% of national consumption, with which goods are produced and transported.

This industry is followed by commerce and transportation (28.45%); in third place is mining (13%), in fourth place are government and other services (public administration, security and defense, social services, etc.).

In fifth place is the agricultural sector (2%), followed by construction (1%) and water and electricity utilities (0.43%).

In short, diesel is present throughout the economic and social life of the world and the country.

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What would be the impacts of increasing the price of ACPM in Colombia?

Currently, the price of a gallon of diesel for the public is $9,358 (except in border areas), of which Ecopetrol and biodiesel producers receive 64% and the State, through taxes (national, VAT, carbon and surtax) 14%.

According to the latest Medium Term Fiscal Framework, as of June 2023 the price of fuel was $5,454 below the amount established by the formula in force for the price of energy. According to these values, the cost of fuel should be approximately $15,200, that is, 64% more expensive.

Bringing it to that value would affect the purchasing power of society, since six out of ten workers receive one or less than the minimum wage. With an income at this level, a worker can buy 124 gallons of diesel, but with the national government’s target price, it would be enough for 76.3 gallons, a reduction of -38.4% of the purchasing power.

The Fiscal Framework also contemplates that from January 2024 the price of ACPM in Colombia will be increased, although Minister Bonilla has said that this could be earlier. In addition, this document evaluates the possibility of imposing a surcharge on gasoline through a tax contribution of $5.4 billion for next year.

That is to say, the price of the fuel used to move the productive sector and transportation, and which has an important impact on inflation indexes and on the decisions of the Bank of the Republic regarding interest rates, would have adjustments between this and next year of more than five thousand pesos per gallon accompanied by higher tax charges on regular gasoline.

According to calculations made by Defencarga, a cargo transporters’ union affiliated to the Inter-Union Chamber of Transport, every one hundred pesos increase in diesel fuel pushes up the Index of Cargo Transportation Costs (ICTC) by 0.37%, changes that would be transferred to the values charged for freight paid by the economic activities that demand the service offered by truckers and that would add to a structural problem of the sector: it moves less and less goods per trip, as can be seen in the following graph.

According to the Ministry of Transportation, 85% of the cargo moved in the country is moved by road, a process that together with passenger transportation and other productive and commercial activities consumes more than 6 million gallons of ACPM per day.

Now, in the event that the price increase estimated by the Ministry of Finance is fully assumed, the country’s daily expenditure on this fuel would increase by $35,100 million, which would leave an additional accumulated expenditure per year of close to $10.5 billion.

The higher cost of fuel would impact the operational costs of the more than 400 thousand trucks, dump trucks and tractor-trailers, and those of the nearly 200 thousand buses, vans and minibuses that travel on Colombian roads. This would be transferred to the cost of all goods, such as food, clothing, vehicles, construction supplies, among others, as well as to the cost of public and private passenger transportation services.

In the process of equalizing the price of ACPM in Colombia to that of the United States, it is necessary to increase by 88% the value paid by large consumers of 67 economic activities, such as the production of bread and sugar, civil engineering works, dairy products, aquaculture, animal and vegetable oils and fats, transportation services, furniture production, and mining and oil activities, among others.

According to the calculations of the Ministry of Finance, as an effective shock of the measure, these sectors would see their costs rise by 26.9%, total inflation would grow by 0.018% and the national government would receive $557,000 million more in 2023.

As Minister Bonilla recently mentioned: inflation could rise again. And not only because of the El Niño phenomenon, but also because of the fiscal adjustment that is being made through gasoline prices and the one projected with diesel prices.

An adjustment that will cost the Colombian population $70 billion and that will be extended to the family basket in the midst of an economic situation in which unemployment is growing, the income of households and companies has weakened and the saving capacity is practically nil.

How will the political economy of this aspect of fiscal policy shake out? It remains to be seen.

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