Fynsa
Every time gasoline prices rise, the Fuel Price Stabilization Mechanism (MEPCO) returns to the public debate. It is called upon to curb price hikes, criticized for its fiscal cost, and, not infrequently, credited with effects it simply cannot achieve. But behind this short-term debate lies something more interesting: MEPCO is, in essence, a mechanism for managing the timing of a shock that Chile cannot control.
Chile has been trying to mitigate the impact of fuel prices for nearly two decades. The first attempt, the Fuel Price Stabilization Fund (FEPC) in 2005, was based on an intuitive approach: saving when oil prices were low and spending when they rose. The problem quickly became apparent: during prolonged price shocks, the fund ran out.
Then came the SIPCO (Fuel Taxpayer Protection System) in 2011, which introduced a key conceptual change. Instead of using a fund, the government began adjusting the specific tax. The government no longer “spent savings,” but rather modified tax revenue over time.
The MEPCO, established in 2014, is an evolution of that design. More than just a fund, it is a system of intertemporal compensation. And therein lies its true nature.
One of the main misconceptions is the idea that MEPCO has “funds,” as if it were a fund. That is not the case.
The Ministry of Finance’s weekly reports clearly show that the mechanism operates by adjusting a variable component of the specific tax on a weekly basis. In practice, this means that the fuel tax in Chile is no longer fixed but has become a dynamic instrument that responds to international prices.
When oil prices rise, the tax rate falls and the government collects less revenue. When prices fall, the opposite occurs. There is no accumulated fund; rather, tax revenue is either brought forward or deferred (a specific tax ranging from 25% to 35%), not including VAT.
The logic behind the MEPCO is to soften the impact. And here a key factor comes into play: the local price and the parity price—the “real” one—almost never coincide immediately. There is always a gap. That gap is precisely the result of the mechanism.
But that difference doesn't disappear; it evens out over time.
The MEPCO does not eliminate shocks; it spreads them out. And that has consequences. On the one hand, it reduces visible volatility and prevents sharp spikes in the CPI. But on the other hand, it creates a form of deferred inflation: what doesn’t go up today will go up tomorrow.
When viewed in perspective, MEPCO functions like a checking account:
But the problem is not just fiscal. There is also a significant macroeconomic effect. The existence of a persistent gap between the real price and the local price means that pressure builds up. In other words, the system generates pending adjustments that, sooner or later, come to pass.
In that sense, MEPCO does more than just keep prices in check; it also manages inflation expectations. This week, the government decided to allow fuel prices to rise sharply, which to me is a sign that the mechanism is beginning to show its limits—or that MEPCO is effectively being phased out.
Ultimately, Chile does not set the price of oil. MEPCO can soften, delay, or spread out the adjustments. It can make them more politically palatable. But it cannot change the level they must ultimately reach. That is both its strength and its limitation.
The MEPCO is neither a permanent subsidy nor a stabilization fund. It is an instrument that transforms the excise tax into a dynamic tool for managing external shocks.
Amid high energy market volatility, Chile is particularly well-positioned for the future, standing out as one of the countries with the best structural conditions globally for the development of the new energy model.
