Fighting fair in fuel

FUEL prices will always be a point of contention. Low fuel costs are a boon to everyone and obviously a boost to the economy; but given the relatively high international prices most experts and monetary organisations feel the high fuel prices are here to stay. In addition to increasing direct expenses such as bus fares, high fuel prices also result in increasing inflation that can increase production costs and lead to an overheating of the economy. Secondary levels of inflation can increase as people agitate for higher salaries to deal with the high cost of living leading to sensitive social, economic and political outcomes.

The latest UN Economic and Social Survey of Asia and the Pacific 2011 (ESCAP) warns that high oil and food prices will reduce up to 1% of GDP. It is estimated that around 42 million extra people will become poor. This is in addition to 19 million that became poverty stricken in 2010. In the face of such daunting statistics the report calls on oil producing countries to set a pricing benchmark. However domestic governments such as Sri Lanka, that as yet, do not produce oil, have to consider other measures to keep prices under control. This usually means the use of subsidies that are often unsustainable and come at huge public cost.

The Sri Lankan Government to a certain extent has been able to delay the inevitable by subsidising Ceylon Petroleum Corporation (CPC) fuel to the public but not only has this come at a heavy public cost it is also unsustainable. The CPC has long been a white elephant more due to the massive levels of corruption and mismanagement rather than the fuel subsidy. The inability of the government to clean up this white elephant and make it break even has resulted in sporadically increasing fuel prices. The reluctance of the government to directly pass on fuel prices is clearly because this would result in its key members becoming speedily unpopular.

On the other side of this paradigm is the Lanka Indian Oil Company (LIOC) that has been making steady losses due to the high taxes levied by the government as well as international prices. The beleaguered company announced on Friday that it was still losing Rs. 31 a litre on diesel even while selling Rs. 9 a litre higher than CPC. The price gap has cut LIOC’s diesel sales volume by 65 per cent, while petrol is sold at a breakeven price. LIOC has managed to offset the losses by expanding sales in other fuel products. It has already captured around 18 per cent share of the lubricant market, 30 per cent of the island’s bunkering sales and 25 per cent of bitumen sales but insists that money for infrastructure is scarce.  

LIOC lost Rs. 422.7 million in the 2010 financial year, compared with a Rs. 1.24 billion loss in 2009.

The firm expects to invest up to $ 7 million in 2011 on increasing petrol storage capacity in the eastern port city of Trincomalee and open at least 10 more filling stations. However its plans to invest in bunkering at the Hambantota Port have gotten a red light from the Sri Lanka Ports Authority (SLPA). If the CPC’s track record is anything to go by, chances of a profitable State run bunkering system at Hambantota is slim. Moreover as a country that is looking for Foreign Direct Investment (FDI) it cannot be perceived to be intentionally undermining competition in a specific sector.       

Therefore for the sustainable measure would be to formulate a fair and transparent fuel pricing structure, thereby passing on price reductions as well as hikes to the people and cleaning up the CPC.