Price of gasoline in Colombia: why is it expensive, what are the implications and where is it going?

July 29, 2023

Gasoline in Colombia is expensive and according to government announcements it will continue to rise in price. These are the reasons and the implications.

gasoline in Colombia, price of gasoline, cars, gas station, Más Colombia

With the price of gasoline in Colombia skyrocketing, the Conservative Party announced that it will present a bill that seeks to reduce fuel taxes -VAT, national tax, carbon tax and fuel surcharge-. Added together, these taxes represent 23% of the final price of a gallon of fuel, according to the former Minister of Mines, Amylkar Acosta.

The purpose of the bill is to counteract the increase in gasoline prices that the national government is carrying out with the argument that it is subsidizing the rich.

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Beyond what is stated in the bill, whose approval is uncertain, the Minister of Finance, Ricardo Bonilla, has insisted that the price of gasoline in Colombia will continue to rise. He also announced that the price of diesel will rise in the near future.

In addition to households, which have seen how the gasoline hikes have directly affected their pockets, several sectors have raised the alarm as their work has been affected. Among them, the most important are home workers and couriers, as well as cab drivers and food and raw material transporters in rural and urban areas, who move their vehicles using this energy source.

The price of gasoline in Colombia is high due to two main problems: first, its calculation is based on the international price of oil and, second, the high percentage of taxes per gallon of gasoline.

Impact on the pockets of Colombians due to the price of gasoline in Colombia

The price of gasoline has a significant impact on various aspects of the national economy. In individual transportation it affects vehicle owners, 79% of whom belonged to strata 1, 2, 3 or 4 in 2014, according to Raddar, a company dedicated to monitoring consumption. The same company estimates that in 2022, car owners in strata 1, 2, 3 or 4 will account for 90%.

But the increase in gasoline prices in Colombia not only affects cars for individual transportation, it also affects the food sector and small businesses that use family vehicles to trade their products.

The current formula for determining the price of gasoline in Colombia includes the producer price (51%), national and territorial taxes (26%), biofuel (ethanol, 7%), distribution (10%) and other costs (6%), as reported by the Ministry of Energy.

However, this formula presents two major challenges: the high percentage of taxes (a quarter of the tariff!) and the dependence on international prices denominated in dollars.

The tariff model based on the international price

During the government of Andrés Pastrana, exactly in 1998, the criterion was adopted that Colombians would pay the price of oil according to its price on the international market, instead of basing it on the cost of production in the country.

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The theory behind this approach is that of opportunity cost for producers. That is, the producer is paid the international price of oil because he could sell it abroad instead of selling it domestically. In this way, he is compensated for the difference.

The opportunity cost thesis for the producer favors oil importing countries. However, it is detrimental to producing countries, since it makes them less competitive by forcing them to pay for a product at a price that exceeds its real domestic cost. Thus, it forces them to give up the comparative advantage of having the resource.

In Colombia, this approach of paying the producer at the international price has been maintained. This decision has generated a constant increase in the price of gasoline in Colombia. From September 2022 to July 2023, the price increased COP $3,200, as can be calculated from information from the Ministry of Mines and Energy.

The international oil price does not depend on production costs either

The international oil price does not necessarily adjust to the cost of production, but depends on geopolitical factors, OPEC decisions and financial speculation.

For example, the brent barrel was quoted at $79 in February 2022, before the Russian-Ukrainian war. Three months after the start of the war, in June 2023, it reached 117 dollars a barrel, according to the portal Datosmacro.

In the case of OPEC’s influence, on June 4 it met in Saudi Arabia and announced that they would reduce oil production by one million barrels per day. This subjects its price not necessarily to market forces, but to decisions and political volatility.

The future of the price of gasoline in Colombia

Over time, the price has experienced significant fluctuations, leading to the creation of the Price Stabilization Fund in 2007.

However, due to legal decisions, which prevented the nation from collecting money when the international price was low, this fund has become structurally deficient and has affected the price of gasoline in the country.

The Fiscal Rule Committee has warned about a possible deficit of the Price Stabilization Fund if the price of gasoline is not adjusted. As a result, since October 2022, monthly increases in the retail price have been applied, until adding up to the COP $3,200 pesos already discussed.

The dependence on geopolitical factors and the uncertainty about the future behavior of oil prices make it difficult to predict the direction of the price of gasoline in Colombia.