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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Tell us the Truth about Petroleum Prices

Tell us the Truth about Petroleum Prices

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1Tell us the Truth about Petroleum Prices Empty Tell us the Truth about Petroleum Prices Wed Jul 18, 2012 12:53 am

sriranga

sriranga
Co-Admin
by Dr Tilak Siyambalapitiya

You open the morning paper on the last working day in each month. You see a notice from the Public Utilities Commission (PUC), explaining the key features of international petroleum price movements within the month. Then you see a table showing the calculation of petroleum prices and the allowed maximum selling prices for the next month. If the notice says prices are to go up on the 1st of next month, if you like, run to the filling station. If the prices are to go down, relax. However, really there is no need to rush, to fill-up or to draw-down, because ups and downs will be limited to a few rupees, at most 3 rupees a litre each month. What is more? You can read the details of the calculation, analysis of prices in the international market and local costs in the beautiful websites of PUC, CPC and LIOC. You can independently verify whether the inputs to the calculation and the calculations themselves are correct.

Dreaming? Certainly not a dream! We had this practice ten years ago. Although on political platforms, the "petroleum formula" is labelled as a property of the Opposition, the Finance Secretary and the Petroleum Minister love it. Actually, it was introduced by the Government of 2002, and abandoned by the same Government in 2004 in the run-up to an election. So really, the formula is nobody’s property. The formula is a symbol of professionalism in pricing, a sign of a mature, civilised society.

Citizens Desire to know

Petroleum users, from three wheeler drivers to big-time industrialists, like to know (a) how much it costs to import or produce each type of fuel, (b) what the other costs (local costs, handling costs, dealer margins, genuine evaporation allowance are (c) taxes and (d) subsidy or surcharges. When the Opposition calls for a price reduction, it will come at the end of the month, even without being asked for. Petroleum users with their superior knowledge of arithmetic will know whether the politicians are right or wrong, because all information is openly available.

No citizen likes the Treasury, CPC or LIOC to go bankrupt. They need the suppliers to make profits, so that they will provide a good service and modernise more filling stations. We like CPC and LIOC officials down to filling station attendants to smile with us and not consider us as nuisance. For that reason, for an improved quality of service, our consumers are willing to pay. Further, no one is against any specific consumer group being subsidised, provided we are told (a) who is being subsidised to what extent, (b) who is providing the subsidy and (c) how much the subsidy costs overall. All consumers pay and receive subsidies, directly or indirectly, all the time.

And the government taxation, too, will appear in the monthly petroleum price calculation and the announcement. No government should be shy of charging taxes from petroleum products, because it is the ‘done thing’ all over the world. Some European countries tax fuel by as much as 100%. Sri Lanka’s tax rates for fuel are nowhere near. The citizens know that they are being taxed, but would like to know by how much.

Govt.’s desire to tell

The government will be relieved of the burden of defending the petroleum prices, because everything is published, but will happily pocket the taxes and use that for worthy causes. The Opposition will have wind taken out of its sails, because all figures are published, and if at all, they can complain about the levels of taxes and question how taxes are spent.

The Petroleum Minister and the Finance Secretary can relax and keep aside the large burden on their shoulders and time they waste defending the petroleum costs and prices, or in other words, time spent to hide the truth about petroleum prices or make sure that they do not contradict themselves.

Professionals will surely debate whether the formula is correct; whether the assumptions are good or bad and whether the indices are too generous for CPC or LIOC. This is all a healthy debate for our learned and mature society, where people will have debates based on numbers and arithmetic, compared with the present debate, which is unquantified and aimed at gaining political mileage.

CPC and LIOC

No CPC employee likes his corporation being branded as a loss-making monster for no fault of theirs but by doing charity dictated by the Finance Ministry. LIOC and LP gas suppliers too do not like the erratic manner in which prices are fixed now. Once the rules are set and the formula is announced, then CPC, LIOC and others can play by the rule.

In the present set up, how on earth can the President question the Petroleum Minister for the losses of CPC? Having contributed to all the confusion in petroleum pricing and causing CPC to make losses "by definition", the Finance Ministry shamelessly wrote in their annual report of 2011 as follows:

"While recognizing the challenges faced, CPC has failed to restructure its management and business model to perform its responsibilities. The lack of a clear strategy on procurements, pricing and, weak financial and operational systems has resulted in the sub optimal utilization of its resources and deterioration in its performance." Partly true, partly contradictory. When petroleum prices are determined by some people outside the CPC (and LIOC) sitting at the Treasury who have only a nodding acquaintance with petroleum market movements, when the pricing formula is ignored and when orders are issued to supply fuel to CEB at Rs. 40 per litre, then how could the CPC be blamed for the absence of "a clear strategy on pricing?" When Ministers keep on saying that petroleum prices will not be increased (or decreased), what strategy can CPC have on pricing?

Here are the costs, if the Govt cannot publish them

As of now, the international market price of petrol is about USD 105 per barrel. Freight into Colombo will be about USD 5. One barrel has 159 litres. So the landed cost of petrol is 110 x 135/159 = Rs. 93 per litre. Of course there are taxes, levies and margins, but can they add up to make the price to be Rs. 149 per litre, which is the selling price now?

The international price of diesel now is about USD 100 per barrel. Following the same calculation above, the landed cost is Rs. 88 per litre. At the pump, we pay Rs. 115 per litre.

And the story goes on. And we are told CPC is making losses. If the above mark-up of almost 50% above landed costs is to make up for past losses, we are happy, but we want to know the amounts the CPC has lost due to each product. That’s why we need the formula.

So, let us get back to the petroleum pricing formula. That is the way democratic societies manage pricing of monopolistic businesses. Petroleum and the Finance Ministries are sure to like it!
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=57030

http://sharemarket-srilanka.blogspot.co.uk/

Whitebull


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
I think there should be a formula for gas prices also.When gas prices was really high during 2008-2009 Gas cylinder(12.5kg) was around Rs1700/=.But now gas prices are realy high....Rupee has been depreciated but can we justify current gas prices even with that ? Earlier they shouted it was because of shell company/privatisation gas prices was high.....Ok now what ?

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