Would the oil subsidy go up or down, if your country currency strengthen against other country currency?


10 pts. for good or detailed answer.

On the assumption that the Oil industry in your country is not deregularized, meaning the there is government subsidy, and we would further assume that your country is not an oil producing country. Also let us assume that our currency is Thai Baht

If a barrel of oil is $50 in the world market and on the assumption that your currency's exchange rate is $1 = 40 baht.

For me to buy a barrel would cost me Tbaht- 2000,

Barrel is still $50 but exchange rate strengthened to $1=38baht.

For me to buy a barrel would cost me Tbaht 1900


since it was cheaper for me to purchase a barrel of oil when my currency strengthen or appreciated, that would translate to a cheaper cost to refine oil.

To further illustrate:
We will assume that FIXED local oil price is 1500 baht per barrel (for the nations consumer already) but the real cost of oil to bring it to the citizen for consumption is assuming (1 is to 1) Baht 2000

Pegged price to sell to consumer 1500 baht per barrel
($50) baht to import a barrel = Fx Rate is $1=40baht = price to give to citizen for consumption per barrel is 1500baht = gov't subsidy is baht 500 per barrel

1500-2000=(500) gov't subsidy per barrel

If Fx strengthen or appreciated: Let $1 = 38baht
1500-1900=(400) gov't subsidy per barrel
see that a 2 baht improvement on the exchange rate reflected 100 baht savings on subsidy.

This is because a stronger currency will make imports become cheaper. So answer to your question is subsidy will go down with a strengthen country currency.

I hope you understand the above simplified explanation and example

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