Merits of automatic fuel pricing

It is hardly surprising that oil is referred to as black gold, given its position as the premier energy source. However, given world market conditions, sourcing and storage issues and growing environmental concerns, economies world over are deciding if oil should be valued as a precious commodity or a fluctuating fool’s gold fuelling the world. 

World oil price volatility mainly stem from operations of the Organization of Petroleum Exporting Countries (OPEC), oil deposit rich ‘petro-states’ like Russia, and private oil-producing firms such as ExxonMobil. 

More recently, events such as the COVID-19 outbreak in 2020 and the Russia-Ukraine conflict caused market disruptions that led to significant price fluctuations. Therefore, as price swings are inevitable some form of State management is not uncommon with 40% of world economies intervening in domestic fuel price setting. Sri Lanka currently has taken a laissez faire approach.

The Ceylon Petroleum Corporation (CEYPETCO) has the base price of gasoline, diesel, and kerosene set by the Government, and leaves the Lanka Indian Oil Company (Lanka IOC) free to set its own. This duopoly has CEYPETCO supplying approximately 2/3rd of the market and Lanka IOC effectively unable to set fuel price. 

This current structure in its best case may result in losses to the Government and fuel suppliers, as fuel is purchased at a price higher than it sells at the subsidised maximum retail price (MRP). The worst case reflects market distortions that give rise to wastage, supply shortages and excessive pollution. 

Sri Lanka has one of the lowest retail fuel prices in South Asia. Offering $ 1.025 per litre for Octane 95 while the average price of gasoline world over is $ 1.27 per litre, Sri Lankan consumers and fuel-based production firms stand to benefit the most. While this allows travelling longer distances for a lesser fare and domestic goods and exports selling marginally cheaper and competitive as a result, the brunt of this non-efficient subsidisation falls back on to the private sector, usually through taxation. 

This means that price should be allowed in some degree to change in line with major world price fluctuations, and reflect current value. Given present fuel shortages that have led to electricity production issues and mile long queues at filling stations, proponents and opponents of unregulated markets alike would be prudent to revisit this topic. 

In 2018, former Finance Minister late Mangala Samaraweera proposed a fuel pricing scheme that was implemented and shortly abandoned. This held that the Maximum Retail Price (MRP) of auto fuels was the result of a simple 4-factor equation: MRP = V1 + V2 + V3+ V4. V1 is the landed cost (Rs/Litre), an average premium per barrel and Exchange Rate (dollar/rupee) being applied. 

V2 reflects the processing cost port charges, transport cost, dealer’s margin whereas V3 is the administrative expenses including personnel cost and depreciation. V4 is the taxation and duties component. This easy-to-understand formula not only arrives at a price that can fluctuate with these key components, but more so transparently provides where the price impact originates from.

Sri Lanka’s single biggest import bill -fuel imports of approximately $ 3.7 billion for 2021, pays for electricity generation, public and private sector production and for vehicle and commercial usage. A fluctuating price would allow individuals and firms to undergo some adjustments, but in understanding a transparent pricing mechanism, eventually be better able to future plan fuel consumption. This can be likened to the one-year FD ceiling rate that adjusts. 

One of the key criticisms of fuel subsidisation is that motorists are a main beneficiary, from a subsidy pool that should be available for all citizens. This too is addressed through a fuel price formula. Furthermore, the argument for some form of structured fuel price adjusting is not only made by economists and the Lanka IOC but also by foreign aid providing entities such as the International Monetary Fund (IMF). This means that fuel will be able to be purchased at a price and sold at a fair market rupee equivalent, easing pressure on the balance of payments and foreign currency reserves. 

Our current fuel shortages, albeit caused by the lack of foreign currency and alleged hoarding of fuel given the economic situation, does in fact shed light on the need for urgent fuel planning. A thought-out repricing scheme may not only be the need of the hour, but provide a ‘Midas touch’ on a loss-making venture.