News
New oil price formula soon; revision every three months
Despite tumbling world oil prices and a tax of Rs. 65 a litre on petrol, the Government has decided not to reduce the local selling price of petrol. Instead, plans are afoot to bring in a new fuel pricing formula where prices will adjust in line with world market trends.
The new pricing mechanism is expected to be presented to Cabinet on January 6 by Petroleum Minister Chandima Weerakkody. The minister did not elaborate on the details of how the new pricing mechanism is to work.
World oil prices this week fell to a record low of US$ 37 per barrel from $85 in October 2014. Local prices have been unchanged since January this year, though India has lowered fuel prices.
In the President’s election manifesto he had promised a “suitable pricing formula” where the people “will get the benefit when world oil and coal prices fall”. Asked why local prices have not been reduced to reflect crumbling world prices, the minister told the Sunday Times by phone while on an overseas visit, that there was no reason to do so as fuel prices were reduced sharply on January 21, this year.
Other officials say that even though the CPC is making profits on the sale of petrol and diesel (nearly Rs. 30 per litre), its accumulated losses have risen to Rs. 244 billion now from Rs. 238 billion at the end of 2014, compelling the state fuel importer to retain current prices.
They said the CPC is also not getting the full benefit of reduced crude oil prices as only refined fuel is being imported since the Sapugaskanda refinery is not operating due to a long breakdown. “Yes there is a benefit from reduced refined oil imports but not as much as raw crude imports,” one official said.
According to Treasury data, the CPC sells a litre of petrol at Rs. 117 while it costs the corporation Rs. 113.39 inclusive of a tax of Rs. 64.40 a litre. Diesel costs the corporation Rs. 79.88 a litre (inclusive of a tax of Rs. 28.02 a litre) while the selling price is Rs. 95 a litre. In both cases, there is a small profit in addition to the tax revenue to the Government.Officials conceded that the Government instead of reducing prices and passing on the benefits to consumers, sees this as an opportunity to collect more tax revenue from fuel sales and recoup past losses.
Crude prices have been mixed in the past year. It was $85 per barrel in October 2014, $75 (November 2014), $59 (December), then further slumped to $44 (January 2015) but rose to $54 (February), $62 (May) and then began easing to $45 (October).
The minister said the new formula has been devised following extensive discussions with the CPC, Lanka Indian Oil Company (LIOC) and other stakeholders, including the Finance Ministry.
“The transparent fuel pricing formula will be a regulated state-run type of system that would benefit both the consumer and the utility. It would change prices every three months based on global prices,” Mr. Weerakkody disclosed.
He noted that the outstanding debt from state institutions and power plants to the CPC was running up to billions of rupees and it has affected the profitability of the corporation.
“By the end of May this year, the public sector owed CPC Rs. 30.4 billion,” he said adding that the corporation was being maintained at breakeven due to cost cutting. With the formula, consumers would be privy to a breakdown of various cost components such as the cost of product in the international market, freight and insurance costs, government taxes and marketing margin, he pointed out.
Welcoming the Government’s move, LIOC Managing Director Shyam Bohra noted that “the formula should be such that it provides reasonable margins to the oil companies to invest in energy-related infrastructure, including storage and efficient distribution of petroleum products.”
He said that even though fuel prices had dropped sharply, the LIOC is losing Rs. 15 to Rs.16 a litre of petrol by selling it at the current fixed price of the Government, since it was selling stocks that were purchased at higher-than-current-prices.
“It would help everyone if the Government could evolve a long-term pricing formula which will provide for adjustment of duties and levies and revision in prices from time to time based on the world market prices, with provisions to protect consumers wherever required,” he said.
Each year, Sri Lanka imports nearly 30 million barrels of oil at a cost of some $2.2 billion.