Vol. 5 Num 689 Mon. May 08, 2006  

Fuel price: Why not face reality today?

Fuel price adjustment in line with international price is a reality. For any country, it is important to take appropriate steps to avoid short and long-term financial strain on the economy. There has been no public reaction against measures to reflect the true cost of fuel procurement (with domestic price being regulated by market forces), except, it seems, in Bangladesh. The question of subsidies from government is never an issue with either the public or petroleum operators in developing and highly developed country which follow either capitalistic or socialistic economy.

Even India has followed an adjustment policy for fuel prices in the domestic market, linking to the international price through careful regulatory control, currency adjustment, rational duty structure, and keeping a realistic border price, all after consultation at the highest policy making levels.

This was done about three years back in India for gradual recovery of the losses incurred by the state oil companies due to the rising trend in international fuel price.

Similarly, BPC should have been increasing fuel prices through gradual adjustment in line with economic growth (i.e. GDP and consumer buying capacity).

In addition, Pakistan and Sri Lanka have followed the same principle to maintain equitable border price with that of India, being a neighbouring country.

Bangladesh is surrounded by an open border with India and therefore the border price in Bangladesh for fuel products should not be less than the border price in India, in order to discourage the smuggling/barter trade being practiced for fuel by the Bangladeshi traders at the border.

The ideal prescription for Bangladesh fuel pricing should have been adopted back in 2002 when there was a proposal to deregulate the price of fuel, or to adjust the administered price (linked with Import Parity Price) in line with the international price, devaluation of currencies, and above all, "devising a price mechanism" to reflect the procurement cost, rational duty structure, and reducing operating cost of the state oil companies.

The other factor was to take the opportunity cost when the international fuel prices were going upward from a bench mark of $32 per barrel for HSD, $42 per barrel for MS, $30 per barrel for kerosene, $40 per barrel for JP1, $16 per barrel for FO and $25 per barrel for crude oil.

The exchange rate at that time was Tk 60 to the dollar and therefore the government ought to have taken steps to implement the price mechanism duly adopted in the gazette but that was kept in abeyance in anticipation of falling price of fuel in the international market.

The government missed this opportunity and is now having to go through this present problem of needing to adjust prices drastically, whereas the adjustment would have been more prudent and acceptable if done on a quarterly basis.

This is because in developing countries like Bangladesh, the narrow time-window for changing prices at Import Parity Price (IPP) levels may provide scope for manipulation -- both at secondary levels as well as at tertiary distributors/retailers levels, leaving the consumers at the mercy of the former.

Exchange Rate Fluctuation (ERF) factor also needs to be considered by creating an ERF Pool to absorb the fluctuations in the dollar exchange rate. Incorporating the above concepts, the suggested pricing formula for administrated downstream petroleum operation could be as follows:

Retails/Consumer Price = IPP+CDVAT+OMC+STC+NDA+ERF (Note: OMC = Oil Company Margin, DM = Dealer's Margin, NDA = National Debt Amortization, STC = Secondary Transportation Cost, ERF = Exchange Rate Fluctuation Pool). The National Debt Amortization will help BPC to recover its losses of Tk 5,500 crores so far over a period of 10 years through this process of amortization.

The above formulation prescribed for fuel pricing is the ideal price mechanism system that the government can follow until the petroleum sector deregulation take place. In fact, the proposed price mechanism was targeted for BPC and its subsidiary public companies to operate on a more efficient basis and recover or reduce financial losses currently sustained by the public sector. The deregulated price will further open up privatization downstream under the energy regulated commission which is now inactive.

With fuel price already exceeding $74 per barrel (crude oil), $85 per barrel (HSD) and liable to go to $100 with the likely dislocation in countries like Iran and Nigeria, economists, politicians, government bureaucracy and end users should face the reality of fuel price adjustment.

China and India are consuming oil at an unprecedented level in order to cope with their economic growth. This has resulted in an unbalanced supply/demand situation world wide, specially affecting the Asian economy and smaller countries in general.

Do we think that Bangladesh can afford to go without fuel import for agriculture, transport, and other vital sectors due to the constraints that they are facing with foreign exchange component for fuel oil procurement, fund support from banking institution, and above all BPC's financial losses?

The government should now take a very pragmatic long-term perspective to face the reality of price enhancement. The price of diesel and kerosene should be adjusted equally to maintain the import parity with that of border price for domestic pricing of these two products, which constitute about 80% of the fuel consumption of the country.

Other fuels like JP 1 and furnace oil come to 9%, MS and octane are 10% of total fuel consumption, and lubricants and others are 1%. So the effect of raising octane and MS prices to offset the loss sustained through diesel and kerosene would be negligible to the extent that there exists Tk 20 per litre cost differential arising out of present procurement of diesel and kerosene from international market.

One suggestion is to replace import of octane by CNG, with a long-term perspective together with innovative technology to improve the octane number and discourage export of naphtha as a distress cargo at the spot market.

The other solution that is most vital is to cover up the procurement loss of diesel and kerosene at three stages of prices adjustment. The immediate step to build up 35% of the loss in the procurement with the IPP.

The second phase is to compensate 50% with the budget for the year 2006-07 through allocation of rational duty structure to absorb the loss plus adjustment with price with international procurement. The last phase of adjustment should be done in December 2006 when the irrigation season will start. This will give a breather to the consumers to absorb the price shocks over the phasing out period.

The automobile segment of small, medium, and large fleet should be banned for import for one or two year to accommodate the economy in other sectors. However, the import of CNG operated auto-rickshaw should be encouraged to operate in all the major cities through liberal import policy.

The dependence on diesel, octane, and petrol should be minimized with regulatory enforcement. As an energy substitute, the policy should be to target alternate energy like renewable energy, CNG-based industry, coal-based power plant in north Bengal, gas-based power generation to be augmented in the next three years without going through bureaucratic channels in the private sector.

Diesel-powered irrigation should be replaced at a gradual pace (through use of gas) and thereby we can save foreign exchange and sustain financial saving with long-term perspective for the country's energy security.

In light of the reality of the international situation and our affordable adjustment with budgetary target, we need to move beyond the controversy over fuel price adjustment, and face the situation with a strong political will to avoid a financial and economical catastrophe. This is for the greater interest of the country and is likely to receive the support of the citizens.

Monirul Islam is a senior ex-government official of the petroleum sector.