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Oil Price Stabilisation Fund at a standstill?

25 Apr 2021

  • PM-chaired committee on fund yet to meet

By The Sunday Morning Business Desk   Regardless of the recent fluctuations in the global oil prices, the Cabinet is yet to greenlight the implementation of the Oil Price Stabilisation Fund, The Sunday Morning Business learns. Speaking to The Sunday Morning Business, Minister of Energy Udaya Gammanpila said the subcommittee, chaired by Prime Minister Mahinda Rajapaksa, for the Oil Price Stabilisation Fund, has not come into force yet and that discussions are currently pending. In 2020, the Government proposed to form an Oil Price Stabilization Fund to absorb the shocks in global price fluctuations without changing local oil prices and also to facilitate the delayed payments of the Ceylon Electricity Board (CEB). Speaking to The Sunday Morning Business last year, Gammanpila stated that the Ministry is working on establishing a fuel price stabilisation fund. “Let’s assume the reference price of a litre of petrol is Rs. 100. If it comes down to Rs. 80, we will equally divide the balance between the fund and the consumer. Later, we will divide one-third of the balance to the fund, and give the rest to the consumer. When there is a price increase, we will see whether we can manage the hike utilising the fund, without increasing local oil prices. If we have enough funds, we will pay from the fund,” he explained. Petroleum product prices are highly sensitive to external economic, political, and social fluctuations. As a country that imports about 80% of its oil requirement, Sri Lanka’s local oil prices are relatively sensitive to these fluctuations.  Therefore, when fuel prices are reduced, consumers will find it cheaper to fill up their tanks, public transport fares will be reduced, and consumers will have more money to spend on other commodities. However, lower oil prices are not favourable for the domestic oil and gas sectors as it discourages investment and employment in the domestic sector. The Ceylon Petroleum Corporation (CPC) has been making massive losses due to irrational price revisions, and caters to about 80% of the national oil requirement, yet the refinery at Sapugaskanda has the capacity to produce only 30% of this requirement. The rest has to be imported from various countries, particularly from the Middle East. CPC supplies petroleum products to the country through its distribution channel, which consists of 1,302 filling stations islandwide.  Speaking to The Sunday Morning Business last month, CPC Chairman Sumith Wijesinghe pointed out that a litre of kerosene is being sold locally for Rs. 70, whereas it should ideally be sold at Rs. 100 per litre to keep up with the global price hike. Wijesinghe stated that as a result of selling kerosene at a concessional rate, CPC ended up incurring a loss of Rs. 35 billion last year.  Therefore, establishing an oil price stabilisation fund could be geared towards tackling never-ending global oil price fluctuations, and their impact on developing economies such as Sri Lanka and its state-owned oil companies. However, if mismanaged, it could damage the profitability of the CPC further and burden consumers. According to data from the Ministry of Finance, out of the $ 3.35 billion import expenditure recorded during 2019, 17% was fuel and related imports by CPC. Since the cost of imports accounts for about 95% of CPC’s total expenditure, its financial performance is directly affected by the global oil price movements and exchange rate, according to reports.   The continuous losses accumulated by CPC over the years, which amounted to Rs. 337 billion at the end of 2019, has had a significant impact on its operations, thereby weakening its balance sheet in the absence of equity infusion. According to a Central Bank report, Sri Lanka’s major contribution to the increase in import expenditure occurred mainly due to higher importation of petroleum products, which resulted in a 6.7 % growth in expenditure on imports of fuel in 2014 over the previous year to $ 4,597 million. The average import price of crude oil imported by Ceylon Petroleum Corporation declined to $ 104.53 per barrel in 2014 from $ 109.84 per barrel in 2013.


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