18 October, 2021

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Is There Any Alternative To The Fuel Price Increase?

By Harsha Gunasena

Harsha Gunasena

Increase of fuel prices by the government created much controversy. It has gone to the extent that the opposition tabled a no confidence motion against the subject minister and the sources of SLPP think that the omnipotent Basil Rajapaksa can give a solution.

It is a fact that the Sri Lankan governments and opposition political parties use the price of fuel to get political benefits. Prices were changed or kept constant by the governments based on political climate rather than economic situation. Therefore, when Sri Lankan government sought assistance from the International Monetary Fund the government was advised in May 2018 to introduce a price formula to the fuel prices so that the selling price of fuel is directly linked to the oil price in the world market.

The IMF suggested this formula to reduce the impact of the oil price to the government budgets. The behavior of the governments in this respect is twofold. On one hand the governments tend to keep the fuel price low irrespective of the price hikes in the international market if they feel that the increase would affect the people, resulting in a budgetary pressure.  On the other hand they keep the local fuel prices high when the international prices were low if they feel that the people can afford it and in this case there is no pressure to the budget deficit and rather the policy of the price of oil facilitated the reduction of the budgetary pressure.

In order to examine these patterns, Table A was presented with the local fuel prices on the dates where the prices were changed along with the international crude oil prices and the relevant exchange rates. In a separate graph change of the international crude oil prices over a period is given. To assess the impact, profitability of the Ceylon Petroleum Corporation (CPC) and Lanka IOC PLC (IOC) are also given in  Table B.

In February 2012 auto diesel price was Rs.115 per Lit. whereas the indicative crude oil price was USD 119 and the relevant exchange rate was Rs.117 per USD. In December 2014 auto diesel price was Rs. 111 per Lit.  whereas the indicative crude oil price was USD 65. A reduction of 50% of crude oil price was reflected in just Rs. 4 of the auto diesel price.  However, the exchange rate was Rs.131 per USD and there was a 12% increase.

Up to 2014 July crude oil prices were over USD 100 per barrel and it started to go down from July 2014. It went down to USD 47 per barrel in January 2015.When the new government came into power and reduced the fuel prices, LP 92 price went down to Rs.117 from Rs.150 per liter. There were further reductions of the international oil prices, but the government did not give those benefits to the people. In January 2016 oil price per barrel went down to USD 30.

This is reflected in the annual reports of CPC and IOC. CPC accounts are maintained for the calendar year, the years ended 31st December and IOC accounts are maintained for the years ended 31st March. In 2015 CPC made a loss of Rs.19 Bn whereas IOC made a profit of Rs. 2 Bn for 2014/15. The local fuel price reduction may have caused the losses of CPC. In the following year, both the companies were profitable taking the advantage of the reduction of oil prices in the international market which was not passed on to the people.

In 2017 there was an upward trend in the international market and by December 2017 price per barrel went up to USD 66. Since there was no price revision in the local market CPC profitability was reduced. IOC profitability cannot be compared since the period was different.

The price formula was introduced in May 2018 and at that time the international price was USD77 per barrel. CPC made a loss of Rs.106 Bn in 2018 which comprised of an exchange loss of Rs.82Bn  and a gross loss of Rs. 3 Bn. The Annual Report of the Ministry of Finance reported that the formula did not cover the full cost of the CPC.

At the time of introduction of the price formula there was much controversy. The price formula introduced by the previous government is as follows:   

The maximum retail Price (MRP) = V1+V2+V3+V4

V1= the landed cost, based on Singapore Platts price per barrel + weighted average premium per barrel + losses due to the evaporation + losses due to the exchange rate.

V2= the processing cost + local port charges + transport cost +dealers’ margin including losses due to evaporation+ stockholding cost

.
V3= the administrative cost including personnel cost+ depreciation + other cost elements,

V4 = customs import duty+ excise duty + ports and airports development levy+ nation building tax+ any other tax

During the 52 day political crisis the formula was abandoned. It was not exercised during the time of the introduction of Budget 2019 in April 2019 and in October 2019 when the Presidential candidates were announced for the Presidential Election and in November 2019 when the Presidential Election was held. In certain months the price was kept constant or reduced despite the increase of prices internationally.

Soon after the President assumed office in November 2019 the price formula was abandoned and the oil prices started to decline from December 2019 and that benefit was not given to the people. Extent of that price reduction can be seen in the graph. Instead the government claimed that they would create a fund and the additional money collected from the people would be credited to that fund so that in case of a price increase increased price could be borne by that fund rather than passing it to the people. Now there are different comments about that fund. This shows how disorganized the government is.

Oil prices is a key element of the economy and government should not take undue profits from oil prices since there is a ripple effect of the fuel price to the economy. Now the oil prices are increasing in the international market amid the covid hit economy of Sri Lanka. Taking into consideration the government finances, the government has no alternative to the fuel price increase.  The prices might be increased further. I believe that if the price formula is applied the fuel prices would be higher than the current increased price, calculating it on the limited information available, especially with the current exchange rate. Current increased prices are lesser than the prices prevailed in February 2013 when the exchange rate was 126.

This is the price the country has to pay due to the abandonment of the fiscal consolidation process by the present government, which was started by the previous government. If that was in operation, taking into consideration of the plight of the people in this difficult time, the  government would have the capacity to postpone the price hike.

On the other hand, increased efficiency at the CPC would push the local fuel price down. V3 of the Price formula can be reduced by this way. CPC efficiency would keep the price at certain level and as a result IOC can make super profits covering under the inefficiencies of CPC. It is visible in the financial accounts. Those who criticize the government for the price hike should focus on this matter as well and demand that the efficiency of all the government institutions be improved.

However, if the government decides to keep the local prices constant due to political reasons while the international prices are going up IOC would be in a very difficult situation. This happened in 2018 prior to establishment of the price formula. It was reflected in IOC accounts. Hence, IOC also would have exercised pressure on the government to increase the local prices.

In this type of situation all parties should support the government. Responsible political parties should not give a wrong impression to the people that the government is having the capacity to reduce the fuel prices. The government as well as the opposition should tell the truth of the economy to the people rather than giving false promises to them. All of them should show by example that they are reducing the waste.

Table A-Local and international oil prices and the indicative exchange rates;

Source-CPC, Central Bank and Macrotrends websites

Brent Crude oil prices:

 

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Latest comments

  • 3
    0

    Regret the Author has not enlarged his comments sufficiently on the fund set up to keep as a buffer against oil price fluctuations. What happened to that Fund.?
    …Instead the government claimed that they would create a fund and the additional money collected from the people would be credited to that fund so that in case of a price increase increased price could be borne by that fund rather than passing it to the people. Now there are different comments about that fund. This shows how disorganized the government is…….

    • 2
      0

      What else to say. They cannot even account for that fund. I do not think that they have robbed that money as in the other cases.

      • 1
        0

        Dear HG
        Thank you very much as few deign to reply.
        As you said ….Now there are DIFFERENT COMMENTS about that fund…..
        I felt disclosing the “different” comments will add to the value of the article.
        ….they have robbed that money as in the other cases….
        But what did they actually spend on.
        Good to know as this type of ad-hoc fund leaves very little room for proper accounting or audit by the AG and though the entire fund is not misappropriated like the “Helping Hambantota” attempt, still there is very loose accounting and used for expenditure other than the intended purpose of the fund and part siphoned off.

  • 1
    0

    “In this type of situation all parties should support the government. Responsible political parties should not give a wrong impression to the people that the government is having the capacity to reduce the fuel prices.”
    “Soon after the President assumed office in November 2019 the price formula was abandoned and the oil prices started to decline from December 2019 and that benefit was not given to the people.”

    The above two paragraphs that this government lead by SLPP was irresponsible to abandon the price formula. So why should now the opposition support this government?
    In Sri Lanka political opportunism and racism with Buddhist Fundamentalism is a norm which destroyed this country since 1947. Today, no one bothered about people or country or justice. Politicians rob, people suffer but are they realised? No.

    • 3
      0

      “So why should now the opposition support this government?”
      Because we cannot throw away the State along with the government.
      Opposition tries to get into power using this as well. By this way they say that they can reduce the prices. No one cannot unless at the expense of the people themselves. When they come into power they also will face the same fate of the present government unless they tell the truth to the people.
      https://www.sundaytimes.lk/210627/news/dollar-crisis-cb-shuts-door-for-commercial-banks-importers-badly-hit-447622.html
      There are enough government follies for the opposition to take advantage.
      This is the repetition of the stances of the oppositions in respect of the national problem throughout the history.

      • 2
        0

        Harsha,
        Do you know what happened to the money saved when the price of oil dropped in 2019?
        Do you understand how the people are affected economically by Corona (lockdown, burnt ship in the sea (unemployment) and unnecessary military expansion, imports of luxury vehicles for MPs etc?
        It is true that you should tell the truth to the people. I am sure that the opposition is not against to the formula used to increase or decrease the price depending on the market. If you support the government to the increase the price while you spent on unnecessary expenses means you also support their unnecessary expenditure as well.

        • 0
          0

          “If you support the government to the increase the price while you spent on unnecessary expenses means you also support their unnecessary expenditure as well.”
          Not really. That is my whole point. It has to be separated and that principled stand will eventually be a credit to them when they are in power.
          I have mentioned in the article that in two instances previous governments did not pass the benifit of price reduction to the people. IOC was also a benificiary.

  • 1
    0

    “Is There Any Alternative To The Fuel Price Increase?”
    Of course there isn’t. Imported fuel cannot be sold below cost. Our politicians made the mistake of subsidizing practically everything. Keeping the price of petrol artificially low also creates the conditions for the hordes of private vehicles that clog our roads. There is no incentive for car users to use public transport.
    Banning vehicle imports was a good decision, even if for the wrong reasons. Diesel could be subsidized for public transport.
    In India, which has some domestic oil, a fuel formula operates, and the current petrol price is about 240 LKR ! But the tuktuk charge for 1.5 km is INR 25. Diesel is only slightly less. This shows that the Indian government is taxing fuel heavily.

  • 2
    0

    Looked only at the Title of the article:
    .
    Is the price of petrol per se so very important? It’s only a symptom of what isso wrong with our country, which has a curse of a government.
    .
    I must read this later, because Harsha (whom I know only from the internet) is a very sincere man. How do I know?
    .
    He once wrote an article praising Jeevan Hoole (the notorious!) so much that most readers would have thought that Harsha was paid to write it.
    .
    I asked who this man, Harsha, was. Hoole doesn’t know who the man is, but he said that Harsha had got all the facts about Hoole right, except for one insignificant detail.
    .
    Thanks, Harsha!

    • 2
      0

      You are welcome.
      I would like know what that insignificant detail was since I worked hard to get that information.

      • 1
        0

        PART ONE: Unnecessary Hats!

        Dear Harsha,
        .
        Suddenly there is so much for me to respond to; therefore it is best that I do so in the most straightforward way that I can.
        .
        I don’t know that detail! Since Hoole himself said that it was insignificant I hadn’t bothered to find out fourteen months ago.
        .
        What seemed important was that there was no “hidden agendum” in your writing about Hoole. You just don’t know him, but you say that you worked hard to get that information. But if you were relying on some other source, even if you now go that source, you won’t be able to find out. So, round and round the mulberry bush we will go, with no way that you can check. Now what to do? See what happens when one talks irresponsibly.
        .
        You could ask him, but then you probably don’t know how to contact him. Now what to do?
        .
        Problem solved! I never pretended that I didn’t know him. See how easy things become when one tells the truth.

      • 1
        0

        PART TWO: The dilemma
        .
        Yes, the problem is now off my plate. How? I telephoned “the guy”. He may be very learned and all that, but still he’s only “a guy.” Some may say that he has faults; even I’ve told him one or two of them. However, he not like our “King, Emperor, and God” all rolled into one. He’s just a guy! Well, humble, obscure, GambadaIskoleMahaththaya telephone the said Hoole at 6.21 pm and in a cordial 5-minute told him the dilemma facing us. Now what to do?
        .
        Well, he had seen my comment, but not yours yet. He couldn’t remember everything about the article, although he had been human enough to have enjoyed all that praise you had lavished on him. So, what to do? Simple. Read the article, tell me so that I could tell you via a comment. How tedious. Why don’t all of us have your phone number so we can all call you, and tell you things. But if that were the case, you wouldn’t be able to do anything useful with the phone ringing every two minutes.

      • 1
        0

        PART THREE: The Solution
        .
        Finding that article might prove difficult for him. I said that although there are many things that I cannot do, navigating in CT is one of the few things that I can do.
        .
        I’ve emailed the link to him, and he will respond to you.
        .
        See how easy when one tells the Truth: either one disappears, white-vanned for ever, or problem transferred to another guy – who, in this instance, is also a simple honest guy.
        .
        If one lie is told, ten more lies are necessary to cover up. Not necessary here! The truth will get to you. That truth may be that Panini Edirisinhe is an ass with a muddled mind. If he does, what to do?

      • 1
        0

        Harsha,
        .
        You will have to wait a day or two, I fear, for any response from Jeevan.
        .
        This is the entirety of the email he’s sent me:
        *
        .
        “I have to go through it. Do not commit me to anything, please.
        I need to finish my book first.”
        *
        .
        In keeping with what I’ve already told you, in most situations, once we adopt a policy of total transparency, there is little to fear in being frank and open”.
        .
        Lest it be thought that I’m being naively innocent, let me hasten to add that in certain matters preserving confidentiality is essential, but that is different from the shadowy secretiveness of the corrupt and the brutal.
        .
        Panini Edirisinhe (NIC 48 3111 444V) aka “Sinhala_Man

  • 0
    0

    Thank god atleast the government had the balls to increase the prices. With imports curtailed the government has no revenue and this is the only option. The prices are still much lower than South Asian neighbors ! In India the price petrol is about Rs 240 and we sell at Rs 157.

    Should introduce a rebate scheme to support low income groups such as fishermen.

    Cannot understand why Diesel is subisidised for V8 Land cruisers and all SUVs.

    Also cannot understand as to why we give kerosene below cost to industrialists and private bus operators.

    Poor energy policy by successively governments.

  • 0
    0

    Motorists must pay for the road development. Fuel prices must be further increased to be closer to prices in India and Bangladesh to fund the urban and rural road development.

    • 2
      0

      Yes, petrol prices should match those in the neighborhood. To compensate, the highway toll can be removed.

      • 4
        0

        There is no reason for the price of things like bakery items to be linked to fuel prices. The price of a cup of milk tea in India is less than 25 LKR even though diesel is over 225 LKR. Bread is about the same as here. Why our prices are so high needs to be investigated.

      • 1
        0

        OC,
        .
        what happened to the collossal sums they saved from Oil ? Why is Media not interested in this crucial issue ?
        .

        • 2
          0

          L.M,
          “what happened to the collossal sums they saved from Oil ?”
          Probably spent on all the free dry rations . Plus 10% to you-know-who

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