The possible implications of the liberalisation of fuel imports in Malta

Abstract

A worldwide movement towards the liberalization of energy markets took place during the last decade. In accordance with EU law, this year Malta will have to liberalise the importation of fuel. The aim of liberalisation is to increase efficiency within the fuel sector and consequently consumer welfare. At the same time, governments want to maintain the security of supply of fuel and to increase the sustainability of the use of fuel. This study assesses the possible implications of fuel imports liberalisation on the Maltese economy. The main implication analysed concerns possible changes in the consumer prices of fuel. These changes are assessed through an international comparison of fuel prices. The possible resulting effects of fuel price changes in Malta are studied via regression analysis. Panel data from the year 1995 to 2005 is used to determine the price and income elasticities of fuel demand. Fuel demand is generally found to be positively related to income and negatively related to price. This conforms to economic theory. If as a result of liberalisation fuel prices were to diminish, this should not have large implications on the demand side of fuel since the main fuels used by consumers i.e. unleaded petrol, LRP and diesel, are all price inelastic. This can be confirmed when considering the recent fuel price hike: prices increased substantially but fuel consumption did not decrease significantly. Light heating oil and kerosene were found to be price elastic, primarily because they have a higher degree of substitutability with other products; however, these two fuels represent only about two percent of total fuel consumption and hence are not likely to bring forth any significant implications.