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Sunday, 17 May 2015

Fuel prices go up!

The price of fuel has gone up. ERB has released the following press statement :
The Energy Regulation Board (ERB) has adjusted the pump prices of petroleum products as follows by K1.14 for petrol; K1.00 for diesel; K0.71 for kerosene and K0.99 for low sulphur gasoil (low sulphur diesel), effective midnight of 12th May 2015. Consequently the prices will now be as follows:

New - 8.74
Old - 7.60

New - 7.59
Old - 6.59

New - 5.40
Old - 4.69

New – 10.88
Old - 9.89
The two key factors that determine wholesale and pump prices are international oil prices and the domestic exchange rate. International oil prices have remained stable during the review period while the exchange rate has been volatile.

Thus, this adjustment is mainly due to the volatility of the Kwacha which resulted in significant depreciation of the Kwacha against the United States Dollar. Since the last price adjustment in January 2015, the Kwacha has ranged between an average of K6.50/US$ and 7.42/US$ in April 2015. During this period, the Kwacha reached an all time high of K7.80/US$ in April 2015.

The last increase in petroleum prices was in April 2014. Between this period to-date, a number of fuel price reductions were effected, mainly as a result of falling international oil prices and a fairly stable Kwacha. Specifically, during the last adjustment in January, the ERB reduced pump prices by K2.29;K2.59 for diesel; and K2.08 for kerosene.

Periodic price adjustments are essential to ensure that there is full cost recovery in the supply chain, and thereby ensure that there is enough revenue to procure future petroleum feedstock cargoes and finished petroleum products.

Fuel price adjustments will be dictated by changes in the key fundamentals. The ERB will endeavour to automatically adjust prices so that the cost reflectivity is attained for each and every petroleum feedstock cargo and imported finished petroleum products.

(Source: ERB)
There are are number of observations worth making here.

First, the impact is as expected given the state of national finances. Keeping the cost below recovery simply worsens the fiscal deficit. The IMF recently noted “The government budget is under stress from significant obligations that have emerged in relation to FUEL and agricultural subsidies, pensions, and road construction. There is an urgent need for action to contain the fiscal deficit in order to alleviate financing pressures that are keeping interest rates high and crowding out lending to the private sector”. So it was only a matter of time before government responded by revising these upwards, particularly given the loses in revenue from mining taxation.

Secondly, the downward reduction in January was always going to be temporary because many of the reasons which drove the downward price for oil appeared to have been led by geopolitics and the influence of the USA in pushing Saudi Arabia and other OPEC producers to stick to higher production levels in order to push the prices so low in the hope that it would hurt Russia and Venezuela. In the end OPEC countries decided to cut production and the price of oil is now going up, aided by falling stockpiles of US crude oil. Of course there’s still a risk that sluggish growth in China and India may mean that oil may not rise significantly above US$67 per barrel, but given the jump from $45 per barrel, when ERB reduced pump prices, the increase in prices us inevitable.

Thirdly, there is some uncertainty as what is likely to be the scale of the impact on our economy, but we can be confident this is certainly bad news. The cost to mining companies have gone up, and the Chamber of Mines are already mourning, even with the revised fiscal regime. Small businesses will also be badly affected, as will all motorists. In short given fuel is a key production cost for many this is bad for the economy. What is more unclear is how this filters out to the rest of the economy. For example, though one would expect public transport fares to increase, it is more difficult to predict by how much. For the simple reason that public transport fares did not fall in January when they should have done. However, it is a question of the extent of collusion in the industry and whether government will exert pressure in that area to make sure that the transport fares are not raised. We can though be reasonably confident that high oil prices will make life slightly harder for government vis-a-vis the 2015 inflation target.

Finally, some will undoubtedly note that Zambians have seen very little benefit from the low global prices of oil experienced last year. ERB waited long to pass on the benefits of low oil prices and when it did, it only lasted for three months! The reason for these delays in passing on benefits appear to be that the nature of Zambia's oil procurement strategy means that we have a lag in seeing the benefits of immediate global reduction in oil. We buy in bulk and for defined periods. If our fuel supply was market based and highly competitive we could see quicker reduction in pump prices, though not without other challenges / risks. Crucially, it is worth noting that the nature of our procurement strategy sometimes means that consumers do not feel price rises as soon as they should. However, in this instance it appears the ERB has been more swift to increase prices than they had been in reducing them.

Chola Mukanga
Bazaar LCopyright © Zambian Economist 2015

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