• Why we need further fuel price hikes 

By Madhusha Thavapalakumar As kilometres-long vehicle queues leading to petrol sheds have become a regular sight now with the persisting fuel shortage against the backdrop of severely low foreign exchange reserves, economists are of the view that increasing fuel prices further would be a key measure that would alleviate fuel-related issues to a certain extent and make the State-owned loss-making fuel enterprise profitable. According to economists whose views were obtained in compiling this article, this increase should be undertaken based on a price formula and it should ideally be revised every day or at least every week as the rupee keeps hitting record lows every passing day, ever since it was free-floated.  Increase prices further, introduce a daily/weekly price formula Advocata Institute Senior Visiting Fellow Prof. Sirimevan Colombage told The Sunday Morning Business that fuel prices should be increased further particularly due to the exchange rate issues causing the rupee to depreciate at a rapid rate.  “Prices have to go up further for the Ceylon Petroleum Corporation (CPC) to operate without losses. They should have followed a fuel price formula earlier. Ideally, a daily formula is better because of exchange rate volatility on a daily basis,” Prof. Colombage stated.  Advocata Institute Chief Operating Officer (COO) Dhananath Fernando too echoed the same opinion, stating that fuel prices had to be increased further due to currency depreciation.  “It is a matter of time for the rupee to record a 100% depreciation against the US Dollar. It is an unpopular opinion, but the prices obviously have to go up. If we cannot come up with a daily formula, we should at least have a weekly one,” Fernando insisted.   Meanwhile, University of Colombo Department of Economics Senior Lecturer Attorney-at-Law Dr. Shanuka Senarath told The Sunday Morning Business that the huge tax component that had been imposed on fuel prices should be taken off.  He stated that fuel shipments that arrived in Sri Lanka were taxed and the collected tax went directly to the Treasury, with the CPC’s losses/profits being calculated only after this.  “The Government should remove the huge tax component. The rupee is depreciating, so prices should be decided based on global prices and exchange rates which will reduce the pressure on inflation as well,” he added.  Mangala’s fuel price formula During the Presidential Election campaign, members of the present Government pledged to abolish the monthly fuel price formula which was introduced by then Minister of Finance late Mangala Samaraweera. Once the Government came into power, it kept its promise and abandoned the formula. At that point, the monthly fuel price formula was largely viewed by the public as a great inconvenience, with people panic-pumping fuel tanks on the ninth of every month anticipating an upward revision of the fuel prices on the 10th of every month.  The current Government not only abandoned the formula but also maintained the prices at September 2019 levels till June 2021. It is unknown what sort of a mechanism or price formula has been used to decide the local fuel prices since June 2021. However, in January 2020, then Treasury Secretary S.R. Attygalle stated that whichever formula was put forward by late Minister Samaraweera was a price mechanism that had been used by the Treasury for the past two decades for fuel pricing, questioning how the Treasury would otherwise have managed to revise prices all these years.  What would the prices have been under the formula today? The fuel price formula is a requirement stipulated by the International Monetary Fund’s (IMF) Extended Fund Facility (EFF) for Sri Lanka. In May 2018, the then Government brought in a fuel price formula that would be revised on the 10th of each month, reflecting fluctuations in the global oil market. The pricing formula was reportedly said to be constructed by a technical committee based on landed cost, processing cost, administrative cost, and taxation. The formula read as ‘Maximum Retail Price (MRP) = V1+V2+V3+V4’. Accordingly, V1, the landed cost, includes Singapore Platts price per barrel, the weighted average premium per barrel, losses due to evaporation, and losses due to the exchange rate. V2, the processing cost, includes local port charges, transport cost, dealers’ margin including losses due to evaporation, and stock holding cost. V3, the administrative cost, includes administrative expenses including personnel cost, depreciation, and other cost elements if there are any. The last component, V4, refers to taxation. It includes customs import duty, excise duty, ports and airports development levy, and nation-building tax. Since obtaining or analysing several costs in the formula including losses due to evaporation, transport cost, personnel cost, and dealers’ margin is difficult with the ongoing issues and lack of data availability, by ignoring V2, V3, V4, and all the components of V1 apart from Singapore Platts prices per barrel, Market Mine has arrived at the following figures for each litre of fuel.  In the oil industry, an oil barrel is defined as 42 US gallons, which is about 159 litres, or 35 imperial gallons.

• Price of a crude oil barrel as of 5 May – $ 107 * Rs. 370 (Central Bank exchange rate for the day as of 5 April 2022) = Rs. 39,590 

LKR price per litre of fuel – Rs. 39,590/159 = Rs. 248

• Price of a Brent oil barrel as of 5 May - $ 110 * Rs. 370 (Central Bank exchange rate for the day as of 5 April 2022) = Rs. 40,700 

LKR price per litre of fuel – Rs. 40,700/159 = Rs. 256 *Note that these prices have not taken into account any of the cost components of the formula apart from Singapore Platts prices per barrel, hence the actual, global oil market reflective prices should be higher than these prices. The calculated price of crude oil is also only applicable if Sri Lanka continues to operate its refinery. However, Verité Research insight finds that the CPC sells fuel at prices higher than the cost of purchasing, processing, and taxes, and that the accumulated losses can be entirely attributed to poor Treasury management (interest costs and exchange rate losses). The Ministry of Power and Energy recently promised to introduce a ‘transparent’ fuel price formula in the near future.  What will happen to the poor? According to Advocata Institute’s Dhananath Fernando, since increasing prices of fuel to precisely reflect the global oil market changes would impact the poorest in the community, the Government should come up with a cash transfer system. “To support the people during price increases, there should be a cash transfer system. Under this system, when fuel prices increase, the allocation of money should also increase. Unfortunately, at the moment, we do not have anything like this,” he stated.