Preliminary Analysis of Petroleum Price Increases
Written by Mohammed Amin Adam Wednesday, 05 January 2011 08:55
The government announced a 30% increase in ex-pump price of petroleum products with the build up covering crude oil price, TOR debt recovery levy, BOST levy, markerting and distribution margins.
There is likely not to be cheap conventional oil any longer . for the past decade, global crude oil output has hovered between 62 million barrels per day and 65 million barrels except in 2006 when it reached 67 million barrels before falling to 65 million barrels and has remained there. At the same time upstream investments are not matching the global supply requirement during to increasing demand. The recent global recovery led by Asia and to some extent Latin America has further put pressure on supply. Global demand is ever increasing and will increase further with the growing global economy. Countries are therefore bracing up to the phenomenon of high oil prices. Some are increasing their efforts at alternative energy mainstreaming and others are introducing conservation programmes.
THE NPP AND NDC
The difference between governments depends on what policies to formulate to mitigate the effects of crude oil prices on the economy – domestic fuel prices, increased transport fares, increased cost of living, inflation, etc.
During the NPP regime , a number of policies were formulated and implemented to mitigate the effects of oil prices on the population. These are – mass transport services, free bus riding for school children, national health insurance, capitation grant, etc. the deregulation policy among others was to reduce the burden of TOR’s inefficiency cost on the prices of fuel, which the NDC government benefited from during the first year and fisrt quarter of the second year when TOR was not producing. These policies were to mitigate the social and economic costs of fuel price increases. The mass transport programme had another policy dimension – energy conservation.
What about the NDC? Apart from the social and economic intervention policies and programmes introduced by the npp, the ndc has not introduced any mitigating policy but yet has increased prices since they assumed office. The only things they are trumpeting now as social mitigating policies against the price increases are the subsidies on premix fuel and kerosene. But this is not new. The npp always subsidized kerosene and premix fuel. The npp had more subsidy programmes than the ndc eventhough it is not a social democratic government. There were subsidies on LPG gas to promote its use rather than the use of woodfuel through deforestation. the ndc has increased LPG prices. The npp had subsidies on diesel and gas oil because they are used by transport operators and this was to reduce the impact of price hikes on transport fares. This was the reason why transport fares did not go up to 18% as it is happening now. The ndc has withdrawn the subsidy on diesel and today diesel cost more than petrol (1.18 pesewas per ltr of diesel as against 1.16 pesewas per ltr of petrol). The effect is that transport fares are higher and cost of other lubricants have also increased. Commercial transportation is being discouraged with its implications for fuel conservation and cost of consumables.
What the government should have done was to cut costs in the price components they have control over as the npp did with deregulation and thereby reduced the debt burden of TOR’s refinery cost by allowing imports of refined products. Unfortunately, the NDC rather increased the costs of these components. These include BOST levy, distribution and marketing margins, and thus allowing the inefficiencies of these bodies to be transferred to consumers. Ghanaians need to know to basis for increasing the BOST levy and the other margins. What due diligence was conducted on these institutions to justify the increase in their cost margins?
There is the argument that fuel prices in Ghana are lowest in the subregion. This is not the creation of the ndc because it has been like that since the npp regime.
One should ask what happened to the hedge the government entered into in October 2009? What has been its effect on the pricing this time? What would have been the prices if we had not hegded? These questions must be answered if the prices announced are to be credible.
There are transparency issues as well. While government is using crude price increases as justification for fuel price hikes, the same government is silent on the oil revenues that will be received by government at the higher crude price. The government must come to the parliament and review its budget projections of expected oil revenues based on $65 per barrel benchmark price they used in the current budget. The truth is that the benchmark price was under estimated because a moving average of the last five years of crude oil prices should give about $75 per barrel and not $65 per barrel and now the dynamics even favour an average year end of about $90 as projected by the INTERNATIONAL ENERGY AGENCY (IEA)
THE WAY FORWARD
There are a number of suggestions that should be explored – some of these have been discussed in the past.
1. Hegding with insurance premium is not the best as it has additional cost to the country in premium payment. The nation should explore futures trading.
2. Reserve stock levels must go beyond strategic reserve arguments to purely stabilization arguments. In this case, government should invest more in reserve capacity. Due to the cost of maintaining reserve stocks, private sector investment should be encouraged so that the BOST levy can be used to pay for their services. Even if the levy is increased, in the medium to long-run, it would stabilize domestic fuel prices.
3. Fuel price stabilization fund – a special levy should be introduced and used to establish a stabilization fund which can be used to compensate for higher crude prices. The country needs to agree on crude price benchmark beyond which the stabilization fund can be disbursed. For instance, we can say that when increases in crude prices are below 5%, the fund should not be disbursed unless it goes beyond this benchmark. This is to ensure that the fund is not dissipated. The introduction of a new levy may in the short run increase domestic prices slightly; but it will help in stabilizing domestic prices in the medium to long term. The philosophy behind this stems from the npp’s social mitigation levy which was introduced as part of petroleum prices and from whose proceeds social interventions such as the mass transport programmes were financed.
4. Each of these suggestions cannot work to perfection. The country needs a combination of these policies to reduce the impact of fuel price increases on the economy on a sustained basis.