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What is fuelling the fuel crisis?

18 Feb 2022

  • Govt. lists plethora of reasons behind issues, while Opposition calls for stakeholder consensus on pricing formula
By Sumudu Chamara In the current economic crisis, like any government would have done, the Sri Lankan Government is trying to keep the most crucial sectors running despite debts, losses, and sometimes questionable management. The country’s energy and power sectors are two such sectors, which keep providing most essential services and products, despite the two sectors being in difficult financial situations due to their own issues and due to issues between them. After weeks of disputes, discussions, and uncertainty, the main institutions coming under the energy sector, i.e. the Ceylon Petroleum Corporation (CPC) and the Energy Ministry, are now struggling to find mid to long-term, sustainable solutions to the crisis in the energy sector, which depends largely on imported crude oil. While there is a discussion about making fuel pricing more methodical and scientific, there is also a discussion about another fuel price hike. Losses, debts, and fuel prices The newest development in the struggling energy sector is Sri Lanka receiving 40,000 metric tonnes (MT) of diesel from India, which, according to the Government, will help manage the crisis in the energy sector for the time being.  Speaking to the media following the receipt of the said stock of diesel, Energy Minister Udaya Gammanpila thanked India for its prompt actions, and explained what this stock of diesel means to Sri Lanka, noting: “The entire world knows that Sri Lanka is facing a foreign currency crisis. The most affected institution is actually the CPC, and at this moment, we are in trouble. That is why we sought the support of friendly nations, and India came forward and offered us a credit line of $ 500 million. While we were in the process of finalising that, we realised that we cannot wait until that relevant agreement is finalised. Due to the drought, there is now a new demand for diesel in the power sector, and due to that demand, we urgently need diesel. We informed the Indian High Commission of this situation, and as a result of these discussions, instructions have been issued to the Indian Oil Corporation to supply us 40,000 MT of diesel.” As the Minister and the Government have mentioned earlier, one of the major issues that has worsened the crisis in the energy sector is the provision of fuel and related products to state institutions on credit, which Sri Lanka has been doing for a long time. According to Gammanpila, the situation has worsened, and has reached a point where the CPC has to require payments at the time of sale, especially from the Ceylon Electricity Board (CEB), in order to prevent the energy sector from collapsing. “The CEB is in debt of more than Rs. 80,000 million to the CPC. The CPC is in debt and is suffering losses due to selling fuel to SriLankan Airlines and the CEB at a loss. The situation is such that the Central Bank asks for rupees from us to give US dollars when purchasing fuel. Who is giving us the money we are losing? We have informed the CEB to pay us in rupees, and we are ready to give any amount of diesel if they can make the relevant payments.” He further expressed concerns about the present situation, emphasising that the CPC does not receive fuel for free and is suffering massive losses.  With regard to the losses incurred by the CPC, at present, there is a discussion about increasing fuel prices again to reduce these losses. Even though the fuel prices were increased several times in the past few months, according to CPC Chairman Sumith Wijesinghe, price hikes not being adequate to cover the said losses is a massive issue.  He explained the current situation regarding fuel pricing and why price hikes are necessary. “When we look at 2020 and 2021, we see that in 2020, due to the Covid-19 pandemic, fuel prices in the world market declined significantly, and that year saw very low fuel consumption. In that context, there was no considerable impact on the CPC with regard to fuel consumption. However, from January to December of 2021, there was a massive increase in fuel prices in the world market. As per our requests, the Energy Ministry, on 11 June 2021, increased the fuel prices. In addition, on 20 December 2021, we increased fuel prices again. These price hikes were in fact made taking into consideration the fuel prices recorded in the previous month. “However, fuel prices in December 2021 increased faster than the fuel prices in November of the same year, and fuel prices in January 2022 increased faster than the fuel prices in December 2021, while fuel prices so far in February have increased faster than they did in January. In this context, on 7 February, we requested the Minister to grant permission for a fuel price hike. We also informed the Minister that the CPC suffers a loss of Rs. 50 from a litre of diesel, and Rs. 17 from a litre of petrol. Also, taking into consideration the present situation of the CPC, we requested that the Finance Minister’s attention be drawn to this matter for an immediate fuel price hike. In addition to that, we have proposed to introduce to the CPC a method to amend fuel prices once in a specific period of time based on the fluctuations in the fuel prices. We have put forward both these proposals, and we are hopeful that the Minister will look into them soon and that he will prepare a suitable methodology to reduce the losses suffered by the CPC.” Fuel pricing formula The discussion on the crises in the power and energy sectors and fuel price fluctuations in the world market are taking place in a context where Gammanpila has stated that he has planned to present a fuel pricing formula to the Cabinet, in order to make fuel price changes more systematic and also fair to both the State and the people. With regard to the CPC’s losses and the fuel pricing formula which is yet to be submitted, Wijesinghe noted that even though fuel prices were increased in the recent past, price hikes were based on the fuel prices in the previous month (in the world market). Also, he stressed that fuel prices in the domestic market not being increased to reflect the increase in fuel prices in the world market is a problematic situation.  “That is why we have requested a reasonable fuel price hike in order to minimise the CPC’s losses,” he said, adding that this is also where the matter of the fuel pricing formula comes in. Wijesinghe explained: “Opposition parties on several occasions discussed the fuel pricing formula that they introduced. Paying attention to the formation of a formula, we have requested that a suitable methodology be formed to decide fuel prices, taking into account costs such as import costs, unloading costs, and distribution costs. We have suggested that fuel price amendments based on such a formula must be made once a month or once every three months.” Responding to a question regarding how much fuel prices, especially the prices of diesel and petrol, should be increased, he pointed out that even though the amount of losses incurred by the CPC from fuel has been identified, in a context where a lot of industries and economic activities depend on fuel such as diesel, more discussions will have to held to determine by how much fuel prices need to be increased.  “Even though it is not possible to cover all the losses at once, what we are suggesting is that we try to do it in several stages,” he emphasised.  Moreover, he spoke of the fuel pricing formula introduced by the former United National Front (UNF)-led Government: “The fuel pricing formula introduced during the UNF-led Government is not a novel concept. Even India has a fuel pricing formula. Several neighbouring countries have such formulas in place to decide fuel prices. It varies from country to country – the method India uses and the method we used are different.” Alleging that even though the UNF-led Government introduced a formula, it was not implemented properly, and adding that it was implemented according to political objectives, Wijesinghe said that he believes that a proper pricing formula, which reflects the true costs and is completely divorced from politics, needs to be introduced. To discuss the importance of a fuel pricing formula and what sort of formula can benefit Sri Lanka, The Morning spoke to the Samagi Jana Balawegaya Opposition Parliamentarian and economist Dr. Harsha de Silva, who was a Minister of the UNF-led Government. He said that it is better late than never, adding that after two years, the Government has realised the truth about fuel pricing. “I am glad that at least now, the Government is trying to act responsibly. The fuel pricing formula was introduced by then-Finance Minister late Mangala Samaraweera, because that was the right thing to do. There is a market clearing price (the price of a good or service at which the quantity supplied is equal to the quantity demanded), and if the Government is trying to sell fuel at a price lower than the market clearing price, what that means is that it is giving a subsidy to the consumers. When a subsidy is given, obviously, the usage increases above what the market clearing price would have expected. Technically, that is not an appropriate move.” Noting that the Government has to deal with this issue immediately, he said that fuel pricing is critically important at this juncture. “A lot of people do not understand this, but it is fuel pricing that causes enormous imbalances in the financial system, and therefore, it is important that whoever is in the Government gets fuel pricing right,” he emphasised. Dr. de Silva further explained: “Now, in the case of the fuel pricing formula, what it tries to do is to reflect market pricing in domestic fuel prices. So, when prices go up in the world market, part of the price increase or the entire price increase is pushed on to consumers, and if fuel prices fall, that benefit is also conveyed to consumers in part or in total. So, there is volatility. In many countries like the US and even in India, you will find fuel prices being adjusted almost every single day, based on some sort of a pre-agreed formula. Now, the issue is, if there are sharp changes in the price, you do not want the prices to go up for example by Rs. 10 today and fall for example by Rs. 7 tomorrow, and again go up by Rs. 3 the next day. You can always have an upper and a lower band, and the price can be allowed to sort of fluctuate between them. When we formed a pricing formula for milk powder and for liquefied petroleum gas, we built such a statistical technique with the aim of managing the volatility. The Government can do that.” These matters, Dr. de Silva said, must be collaborative exercises between the Government, the industries, price regulators, and also consumers’ representation. He also said that everyone meeting and discussing, understanding the issues, being on the same page, and agreeing on the final pricing formula, are important.  “So, my suggestion is to do that. That is what developed countries, and well-governed countries do, and that is exactly what we the UNF-led Government did,” he said, while also emphasising the importance of every person getting an equitable price. According to Gammanpila, in addition to proposals regarding a fuel pricing formula, requests have also been made to remove all taxes on fuel imports, in order to provide the CPC some relief and thereby manage fuel prices in the domestic market despite losses. While price hikes do not generally receive favourable responses from consumers, a pricing formula would perhaps be able to control price hikes or the impact of price hikes, because a systematic formula also involves reducing fuel prices when costs decline. As many countries are already using such formulas and in a context where Sri Lanka too has tried to do that in 2018, perhaps a fuel pricing formula can be the long-term solution we have been seeking for years. However, as was mentioned earlier, such methods should be implemented properly in a way that benefits both the State and the people, without being subjected to political influences.


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