Raising gasoline prices and lowering growth – Sep 11,2023

The average price of Octane-95 gasoline around the world is US$1.35 per litre. There is a considerable difference in these prices among countries. Usually, richer countries have higher prices while poorer countries and the countries that produce and export oil have much lower prices (Jordan is among the exceptions to this rule). The differences in retail prices across countries are caused by taxes and subsidies, which vary from one country to another.

The government in Jordan opted to raise the gasoline and diesel prices as of September 1, 2023. It is important from an economic perspective to figure out the standing of Jordan relative to other countries and determine whether such an action places the economy in a depressed state or not. To keep this article short, the focus is on Octane-95 gasoline.

Relative income and pricing
When analyzing and comparing prices, beyond the absolute values of gasoline prices, one needs to look at the relative income in the country and compare the price relative to income among the comparators. The relative price of Octane-95 gasoline in Jordan is 15% of the daily income per person, which ranks Jordan as the 12th most expensive country for gasoline in the Arab world.

In absolute numbers (i.e., in terms of the price of gasoline), Jordan is the 15th highest Arab country.  In the USA, where income is 18.2 times that of Jordan, Octane-95 gasoline is sold at US$1.09 per litre, and in some states it is as low as US$0.7 per litre. Imagine the riots and chaos in the US if the price of a litre went to US$18. Even in Germany, where the average income is almost 12 times that of Jordan, the price is US$2 per litre, which is 1.6% of the average daily income there; in Jordan, it is 15% of the average daily income, in other words, it is 10 times as high in Jordan.

Taxation and growth
Gasoline in Jordan is heavily taxed; some say by 75% (but the formula is nobody’s business, it seems). On the other hand, principles of proper governance dictate that governments use taxes on fuel to fix roads, address environmental issues, and subsidize technologies. Otherwise, the taxes become a tool for additional taxation to generate more income for the government.

Furthermore, the government is supposed to provide alternatives that minimize the use of cars, such as proper pavements and marked bike routes to enable bike riding, electric and hybrid cars at subsidized rates, and proper public transport systems. All of which are monopolized in terms of provision by the government.

Although the discussion above does not address the recent rise in diesel prices, which is used in freight and production in addition to heating, it is vital to point out that raising the price of diesel will adversely affect economic growth in the country and thus possibly derail the achievement of some of the main goals of the Economic Modernization Vision. Why? There are three main categories of inputs that are used in production: capital which is machinery and manmade inputs, labour, and land, which is energy, fuel, water, and minerals. Raising the prices of all three (interest, wages, and energy prices) will not lead to encouraging investment and growth. 

To grow the economy the government must utilize economic (not accounting) principles, work with a long-term perspective, and repeal some of the hurdles already in place. Because countries are not run as companies, there should be no time to waste.

Published on Jordan News:

https://www.jordannews.jo/Section-36/Opinion/Raising-gasoline-prices-and-lowering-growth-30816