until when can the government afford to subsidize fuel

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After the carriers’ strike and many voices demanding a brake on fuel and energy prices, the Government has confirmed that it will subsidize part of the price of fuel. The measure is part of an economic shock plan to stop the consequences of the Ukraine War. Regarding fuel, all drivers will be helped with 20 cents/liter. But until when?

the crash plan. The announcement has arrived during the has arrived during cycle “Opportunity Generation”organized by Europa Press and McKinsey, and has been confirmed by Pedro Sánchez himself in front of a large number of representatives of the Ibex 35. An aid package that also includes rental aid or 10,000 million in ICO loans.

20 cents/liter. The great surprise of this aid package is the subsidy of 20 cents/litre for all drivers. It is an extension of what has already been decided with the carriers to lift the strike. Of the 20 cents/litre, 15 of them will correspond to the State and the remaining five cents to the service stations.

The cost. During the announcements of the last days, the Government estimated the cost of lowering 20 cents / liter to carriers at 450 million euros during the three months that, initially, the measure will last. With current prices and taking as reference the consumption of January (latest data available), the State would have collected more than 1,000 million euros each month.

With the fuel expense that was made in January (about 1,634,809,350 liters between gasoline and diesel), the State will have to pay about 245,221,402 euros monthly. To this direct aid, which will be applied at the service station itself, will be added the 81,740,467 euros per month that these companies will have to support with their five cents/litre.

taxes. The decision to lower the final price of fuel has two interpretations. The first is that, if the price of fuel rises, we will continue to pay more in the same proportion. The second is that, if taxes had been affected, only VAT would have alleviated this. And in part. In other words, lowering the VAT percentage would lower the final prices automatically, but raising it would also do so. Of course, to a lesser extent, since the percentage to apply would be lower.

Therefore, having lowered the Special Tax on Hydrocarbons, the result would have been the same as lowering the final price, since it is fixed and immovable, whatever the final price of the fuel. Also, less money would be raised. By maintaining the VAT and subsidizing the final price, the State ensures that part of that subsidy is collected with the increase in fuel itself. In addition, it would be to lower taxes in one of the countries that taxes fuel less.

The tunnel. The war in Ukraine has plunged Europe into a tunnel in which, for the moment, the light is not seen. Sanctions on Russia and difficulties in maintaining supply chains have made products more expensive, reaching inflation above 7%. And the oil market is in the spotlight.

A week ago the possibility of vetoing Russian oil is on the table, as this is one of the country’s main sources of income. This has boosted the price of the Brent Barrel, which was below 100 dollars but has once again risen above this barrier. We have to wait to see if this price eventually becomes a new standard.

How is it possible that gasoline is at its all-time high if oil has not yet reached it?

More expensive. Taking Russia out of the world oil market has a direct impact on the world economy. The mere possibility of applying restrictions has made hundreds of companies move their activity in search of new sources of income. The same happens with the oil companies, which are already looking for resources in new countries in order to face a possible shortage derived from the Russian oil veto. In fact, they are already juggling for their purchase.

Without Russian oil, Europe is left without half of the diesel fuel it consumes. In an increasingly stressed market, April does not promise a very promising future. The United States and Canada produce oil by fracking for plastics, but it is not suitable for diesel. The oil in the available markets (including Europe) has a high sulfur content and that would cause shoot up refining costs and, therefore, of the final price.

Even when? That is the big question. The question for which we have no answer. If a minimum price is not established at which to stop directly subsidizing fuel consumption and there is not a very hopeful scenario on the horizon, how long can the State support directly subsidizing fuel consumption? At the moment, the intention is to do it until June 30. But what if prices by then hold? What if the figures we are now refueling with become the “new normal”?

Photo | Joshua Goge and Jason Blackeye

After the carriers’ strike and many voices demanding a brake on fuel and energy prices, the Government has confirmed that…

After the carriers’ strike and many voices demanding a brake on fuel and energy prices, the Government has confirmed that…

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