The Price of a Barrel, the Cost of Short-Sightedness

Introduction

Chile possesses one of the most peculiar geographical configurations in the world. Stretching approximately 4,270 kilometers (2,653 miles) from north to south, it is among the longest and narrowest countries on Earth, with a width varying between approximately 90 and 445 kilometers (56 and 276 miles). Its continental and insular territory covers 756,102 square kilometers (291,900 square miles), exceeding 2 million square kilometers (772,000 square miles) when including Chile's Antarctic territorial claim, which remains subject to the Antarctic Treaty system.

Its geography is equally extraordinary. To the north lies the Atacama Desert, the driest non-polar desert in the world; to the east, the Andes, the world's longest continental mountain range; to the west, the vast Pacific Ocean; and to the south, the difficult waters approaching Antarctica. Chile also possesses approximately 2,000 volcanic formations and a complex landscape of mountains, longitudinal valleys, and transverse valleys. As a geographical metaphor, the country almost appears to be falling from the Andes into the ocean.

These characteristics have profoundly influenced Chile's economic development, transportation infrastructure, and productive activities. Its extensive territory, natural barriers, northern mining regions, and geographically isolated southern communities create enormous logistical challenges. Road freight, maritime transportation, aviation, and heavy machinery remain essential to connecting the country and sustaining its economy. Consequently, petroleum and its derivatives continue to play a fundamental role in Chilean economic activity, despite the increasing importance of renewable energy and electrification.

The problem is that Chile produces only a negligible fraction of the petroleum it consumes, making it overwhelmingly dependent on international suppliers. This combination of geographical constraints, transportation requirements, and external energy dependence leaves the country particularly exposed to fluctuations in international oil prices. For Chile, an increase in petroleum prices is not simply a matter of more expensive gasoline. It is a structural economic problem affecting production, transportation, inflation, and ultimately the cost of living.

I. Why Chile Pays International Oil Prices

Chile is one of the South American economies most dependent on imported petroleum. Although the country possesses limited domestic hydrocarbon production, nearly all the crude oil required by its refining industry comes from abroad. This structural dependence is particularly important because petroleum remains a fundamental input for transportation, mining, industry, and the distribution of goods across the national territory. When international oil prices increase, Chile cannot significantly offset those costs through its own production.

The Empresa Nacional del Petróleo (ENAP), Chile's state-owned oil company, purchases most of its crude oil from Brazil, Argentina, and Ecuador. This geographical diversification provides advantages in terms of transportation, commercial relationships, and security of supply. However, proximity does not necessarily translate into lower prices. Oil-producing countries and international suppliers operate in markets where crude prices are influenced by global benchmarks such as Brent and WTI, adjusted for quality, transportation, contractual conditions, and other commercial factors. A Brazilian or Argentine producer has little economic incentive to sell petroleum to Chile substantially below its international opportunity cost simply because the countries share the same continent.

The recent agreement between ENAP and several producers operating in Argentina's Vaca Muerta illustrates this distinction. The contracts, extending to 2033, are expected to supply approximately 35% of ENAP's annual crude requirements through the Trans-Andean Pipeline. This represents an important improvement in supply security because pipeline transportation can reduce logistical exposure, diversify delivery routes, and facilitate more predictable supply. Nevertheless, the existence of a pipeline does not isolate Chile from international petroleum prices. Supply security and price independence are two fundamentally different economic objectives.

A second distinction is equally important: the crude oil market and the refined petroleum-products market are not identical. Chile imports crude oil for domestic refining, but it also purchases finished products, particularly diesel and gasoline, from international suppliers. Refined fuels are affected by the underlying price of crude oil and by additional factors such as global refining capacity, product inventories, transportation, seasonal demand, and refining margins, commonly known as crack spreads. Consequently, diesel prices can rise substantially faster than crude prices when international refining capacity becomes constrained or demand for middle distillates increases.

This difference matters because Chile's petroleum exposure is not limited to the cost of purchasing a barrel of crude. ENAP's pricing structure operates with reference to import parity, meaning domestic wholesale fuel prices reflect the cost of obtaining equivalent products in international markets. Even when petroleum is refined domestically, the economic value of its products remains connected to international alternatives. Domestic refining contributes to industrial capacity and supply security, but it does not eliminate the global opportunity cost of petroleum.

The exchange rate introduces another source of vulnerability. International crude oil and refined petroleum products are generally priced in U.S. dollars, while Chilean consumers and businesses earn and spend primarily in pesos. An increase in the international price of petroleum therefore becomes more expensive when accompanied by a depreciation of the Chilean currency. A 10% depreciation of the peso, holding other factors constant, increases the peso cost of a dollar-priced import by approximately 10%, even if the international dollar price remains unchanged. When both oil prices and the dollar increase simultaneously, the two effects reinforce one another.

This combination explains why purchasing petroleum from neighboring countries does not protect Chile from international price shocks. Diversification reduces the probability that the interruption of a single supplier will generate an immediate shortage, but it cannot eliminate exposure to the global market. Chile can negotiate contracts, improve transportation infrastructure, and maintain multiple sources of supply. What it cannot do is require producers in Brazil, Argentina, Ecuador, or the United States to disregard the international value of the petroleum they sell.

Chile has diversified the geographical origin of its petroleum, but it has not diversified away the international price of petroleum itself.

II. A Country Without a Substantial Strategic Buffer

Chile's dependence on imported petroleum becomes even more consequential when examined alongside another structural weakness: the absence of a substantial state-controlled strategic petroleum reserve comparable to those maintained by several major importing economies. This issue receives considerably less public attention than the price of gasoline or the taxation of fuels, despite its implications for national energy security and economic stability.

Chile does maintain petroleum inventories. Its regulatory framework requires importing companies to hold stocks equivalent to approximately 25 days of their average domestic sales over the previous six months. These stocks provide an operational buffer against temporary interruptions and help maintain continuity in the distribution system. However, mandatory commercial inventories are not the same as a large strategic reserve that the government can independently mobilize during an international emergency.

The distinction becomes clearer when considering the International Energy Agency's emergency stockholding system. IEA member countries are required to maintain petroleum stocks equivalent to at least 90 days of net imports, using public, industry-held, or mixed arrangements. Although Chile's 25-day commercial-stock requirement and the IEA's 90-day import requirement are calculated on different bases and are therefore not directly comparable, they illustrate different approaches to preparing for international supply disruptions.

A strategic reserve does not make petroleum cheaper in the long term, nor does it eliminate dependence on international markets. Its primary economic function is to provide additional time and flexibility when normal supply arrangements are interrupted. Governments can release emergency inventories, maintain essential services, reduce the immediate consequences of transportation disruptions, and avoid making every purchasing decision under the most unfavorable market conditions. Such reserves can temporarily relieve pressure, but they cannot permanently insulate an importing country from the international price.

For Chile, the issue is particularly relevant because petroleum demand is relatively price-inelastic in the short term. Price elasticity of demand measures how much the quantity demanded changes in response to a change in price. When demand is inelastic, a substantial increase in price produces a proportionally smaller reduction in consumption. This occurs when consumers and businesses have few immediate alternatives, especially for goods and services considered necessary for everyday economic activity.

Chile's geography reinforces this condition. Its territory extends for more than 4,000 kilometers from north to south, creating substantial requirements for long-distance transportation, freight distribution, and regional connectivity. Trucks cannot immediately replace diesel with another energy source when petroleum prices increase, and the transportation of food, industrial inputs, construction materials, and other essential goods cannot simply stop without imposing additional costs on the economy.

The mining sector provides an even clearer example. Copper mining, particularly in northern Chile, requires substantial energy for extraction, transportation, and the movement of materials. Although electricity plays an increasingly important role and renewable generation has expanded considerably, diesel remains essential for many heavy vehicles and mining operations. According to Chilean mining-energy data for 2025, diesel represented approximately 93% of the sector's fuel consumption. Replacing that equipment and its supporting infrastructure requires investment, technological adaptation, and time. An international petroleum shock therefore cannot be absorbed simply by asking mining companies to consume less fuel.

This combination of import dependence and inelastic demand creates an important economic vulnerability. When international petroleum prices increase, Chile must continue purchasing the fuel necessary to operate its transportation networks, mines, and productive activities. The immediate response is often not a substantial reduction in demand, but an increase in operating costs that spreads throughout the economy. Transportation becomes more expensive, production costs rise, distribution margins come under pressure, and households experience the effects through both direct fuel purchases and the prices of other goods and services.

The absence of a substantial strategic petroleum reserve adds another dimension to this problem. Chile is not only exposed to the price of imported oil; it also has limited public capacity to replace disrupted supplies from independent emergency inventories. Commercial stocks and diversified suppliers provide some protection, but neither offers complete security against a prolonged international interruption affecting multiple exporters or transportation routes simultaneously.

This raises a question of public policy that goes beyond immediate fuel prices. Establishing a strategic petroleum reserve would require financing, storage infrastructure, maintenance, inventory-management rules, and a clear framework determining when emergency stocks could be released. Such a policy would involve considerable costs and should therefore be evaluated according to its expected benefits rather than assumed to be economically justified in every circumstance.

Nevertheless, those costs must be compared with the potential consequences of a severe supply disruption. For an economy whose transportation and mining sectors remain highly dependent on petroleum, the inability to maintain essential activity during an international emergency could produce losses extending far beyond the initial cost of the imported fuel.

Chile's central vulnerability is therefore not simply that it imports petroleum, but that its economy depends heavily on a product whose international price it cannot control, whose short-term consumption it cannot easily reduce, and whose supply it has limited independent capacity to replace during a major emergency.

III. The Tax Burden: A Domestic Component of Fuel Prices

Chile's dependence on imported petroleum explains why international price fluctuations affect the country so directly. However, the international market is only one component of the final price paid by consumers. Domestic taxation also plays an important role, introducing a fiscal dimension into a problem that is frequently explained exclusively through the international cost of oil and the exchange rate.

Chile applies a 19% Value Added Tax (IVA) and a specific tax on automotive fuels established under Law No. 18.502 of 1986. The statutory base of the specific tax is 6 Monthly Tax Units (UTM) per cubic meter of gasoline and 1.5 UTM per cubic meter of diesel. These amounts are subsequently adjusted through the Mecanismo de Estabilización de Precios de los Combustibles (MEPCO), which modifies the effective tax burden to moderate changes in domestic fuel prices. Consequently, the tax actually collected may differ substantially from its statutory base, particularly during periods of severe international volatility.

The historical justification of this taxation deserves attention. Fuel taxes existed in Chile before 1986, with legislative precedents dating back to 1947. Although their relationship with road construction, maintenance, and infrastructure financing has frequently been invoked in political debates, the legislative history does not establish that the current specific fuel tax was created exclusively to rebuild roads after the 1985 earthquake. Nevertheless, the relationship between fuel taxation and infrastructure financing raises an important question because Chile's transportation system has changed substantially since the tax was established.

Beginning in the 1990s, Chile increasingly adopted a concession model under which private companies finance, construct, operate, and maintain major highways and other infrastructure in exchange for toll revenues or other contractual compensation. This system has helped expand and modernize the country's transportation network, but it has also changed the relationship between motorists, infrastructure financing, and the State. Users of concessioned highways may pay directly for their use while simultaneously facing the general and specific taxes incorporated into fuel prices. Although the government continues financing extensive public road networks outside the concession system, the expansion of privately financed infrastructure provides a reasonable basis for reconsidering whether the existing fuel-tax burden remains economically appropriate.

The argument cannot be reduced simply to eliminating a tax because private companies now operate some highways. Fuel taxation may also be defended on environmental and economic grounds, including pollution, greenhouse-gas emissions, congestion, and road deterioration. These are external costs, meaning costs imposed on others that are not fully reflected in the private price of an economic activity. Nevertheless, the existence of externalities does not automatically justify any particular tax rate. A sound economic policy should establish whether the tax is proportional to the costs it seeks to address, whether its burden is distributed appropriately, and whether other instruments could achieve similar objectives more efficiently.

There is also a relevant distinction between gasoline and diesel taxation. The statutory specific tax on diesel is considerably lower than the corresponding tax on gasoline, and certain businesses can recover part or all of the diesel tax under legally established conditions. This reflects, among other considerations, the productive use of diesel in mining, industry, and freight transportation. However, different tax treatment across sectors also creates questions about neutrality, incentives, and the allocation of fiscal burdens between households and businesses.

MEPCO adds another dimension to the discussion. By adjusting the variable component of the specific tax, the mechanism can temporarily absorb part of an international price increase, reducing the immediate impact on consumers. This is particularly relevant during periods of sharp oil-price volatility. Yet price stabilization does not eliminate the international cost of petroleum; it changes how and when part of that cost reaches consumers and public finances. Depending on the circumstances, the mechanism can reduce tax revenue or generate fiscal costs while protecting households and businesses from more abrupt adjustments.

The fundamental question is therefore not whether Chile should collect taxes on petroleum under any circumstances, but whether its current fuel-tax structure is consistent with the country's geographical constraints, dependence on imported energy, productive requirements, and household purchasing power. Taxation is determined domestically, unlike the international price of crude oil. The government cannot control Brent or the exchange rate, but it can examine the efficiency, economic justification, and distributional consequences of its own fiscal policies.

IV. The Structure of Chilean Public Revenue

The difficulties associated with reforming fuel taxation cannot be understood without examining the broader structure of Chilean public finances. Like every government, the Chilean State requires revenue to finance public administration, infrastructure, education, healthcare, social programs, security, and other responsibilities. However, the composition of that revenue is particularly important because different taxes affect economic activity, consumption, investment, and household income in different ways.

Chile possesses a relatively broad consumption-tax system but a narrower personal income-tax base than many developed economies. According to OECD data for 2024, Value Added Tax accounted for approximately 42% of total tax revenue, while corporate income taxes represented approximately 21%. Personal income taxes contributed around 11%, and property-related taxes approximately 6%. These figures illustrate an important characteristic of Chilean taxation: consumption and business profits contribute substantially to public revenue, while personal income taxation plays a comparatively smaller role.

This becomes more revealing when examining the income distribution of Chilean workers. According to the National Statistics Institute (INE), median monthly employment income reached approximately 680,000 Chilean pesos in 2025, meaning that half of employed individuals earned that amount or less. By October 2026, the monthly exemption threshold for the employment-income tax (Impuesto Único de Segunda Categoría) was approximately 974,000 pesos of taxable income. Although these figures use different income definitions and cannot be compared directly to determine the number of taxpayers, they illustrate the considerable distance between typical labor earnings and the threshold at which this particular income tax begins to apply.

The result is an important fiscal asymmetry. A worker may earn too little to be subject to the monthly employment-income tax while still paying VAT on most taxable purchases and bearing the economic consequences of fuel taxation through transportation and consumer prices. In other words, being exempt from personal income taxation does not mean being exempt from contributing to public revenue. The burden is instead collected through other transactions, frequently without the same visibility that accompanies deductions from wages.

This distinction is particularly relevant to the petroleum question. Fuel taxes directly affect motorists and businesses that purchase gasoline or diesel, but the economic consequences extend further. Higher transportation costs can be transmitted through the distribution of food, agricultural products, manufactured goods, construction materials, and other essential items. The final incidence of these costs depends on competition, demand, available substitutes, and the capacity of firms to absorb them, but households that do not own vehicles may still experience their effects through the prices of goods and services.

Copper introduces another dimension into the fiscal structure. As one of the world's principal copper producers, Chile receives public revenue through corporate taxation, mining royalties, and contributions associated with state-owned production. These revenues are economically important, but they are also exposed to international commodity prices, production costs, investment cycles, and changes in global demand. Higher copper prices can strengthen the fiscal position, while weaker prices or reduced production can limit available revenue. Consequently, part of the State's fiscal capacity remains connected to international markets that Chile does not control.

The interaction between these revenue sources helps explain why reforming the specific fuel tax is politically and fiscally difficult. Eliminating or significantly reducing it would provide relief to certain consumers and productive activities, but it would also reduce an established revenue stream. The government would then face the alternatives of reducing expenditure, replacing the lost revenue through other taxes, increasing borrowing, or improving its fiscal position through a combination of economic growth and more efficient public spending.

However, the fact that a tax finances public expenditure does not, by itself, demonstrate that its economic design is optimal. Every tax produces incentives and may affect consumption, production, investment, or the distribution of income. An economically sound fiscal system should therefore be assessed not only by its ability to collect revenue but also by the costs imposed in obtaining that revenue and the value generated through public expenditure.

For Chile, the underlying challenge is that a relatively narrow personal income-tax base, substantial reliance on VAT and corporate taxation, and exposure to copper-market conditions limit the room for easy fiscal adjustments. This becomes particularly uncomfortable during an international oil-price shock, when the government must balance its revenue requirements against the effects of rising energy costs on households and the productive economy.

Chile's fuel-price problem therefore cannot be separated from its fiscal structure. International oil markets determine much of the underlying cost, but domestic taxes influence the final burden, while the composition of public revenue constrains the government's ability to reduce that burden without creating additional fiscal pressures. Understanding this relationship is essential before considering whether the existing system should be maintained, modified, or replaced with a more efficient arrangement.

Conclusion: The Price of Dependence

Chile cannot control international petroleum prices, nor can it expect neighboring producers to sell crude oil or refined products below their international market value. Its geographical configuration, extensive transportation requirements, and dependence on imported energy make the country particularly vulnerable to external shocks. Supplier diversification can improve the security of supply, but it cannot eliminate exposure to international prices or exchange-rate fluctuations.

Nevertheless, not every component of this vulnerability is beyond Chile's control. The country's limited strategic petroleum reserves, dependence on diesel-intensive economic activities, and domestic fuel-tax structure are matters that can be examined through public policy. The expansion of privately operated highway concessions also raises legitimate questions about the economic justification and distribution of existing fuel taxes. Although taxation serves important fiscal purposes, maintaining a source of public revenue should not automatically be confused with maintaining an economically efficient policy.

The underlying difficulty becomes more serious when considering Chile's broader economic structure. Weak productivity growth, limited improvements in real household income, and a fiscal system heavily dependent on consumption and corporate taxation restrict the country's ability to absorb external shocks. Higher petroleum prices consequently become more than an inconvenience for motorists. They affect transportation, production costs, business competitiveness, inflation, and household purchasing power, particularly in an economy where geographical distances make fuel consumption difficult to reduce in the short term.

The central problem is therefore not simply the price of a barrel of oil, but the economic cost of Chile's structural dependence and limited preparation. International markets determine much of what Chile must pay for petroleum, but domestic decisions determine how vulnerable its economy remains when those prices increase. A country cannot eliminate the geographical conditions it inherited, but it can reconsider the policies through which it responds to them. Ultimately, the price of a barrel is largely determined abroad; the cost of being unprepared is determined at home.

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