Rationalising prices of petroleum products

| Updated: October 23, 2017 11:25:04

Rationalising prices of petroleum products
The government last week reduced the price of A-1 jet fuel, known as aviation fuel, by around 8.0 per cent against the backdrop of falling oil prices in the international market. But no decision has yet been made to cut down the prices of other petroleum products.
State-run Bangladesh Petroleum Corporation (BPC), according to reports, has reduced the A-1 jet fuel price by 7.93 per cent to 58 US cents per litre for international flights taking off from the country's main airport in Dhaka and by 8.06 per cent to 57 US cents per litre for flights leaving from Chittagong airport.
Aviation fuel price has also been reduced by 8.82 per cent to Tk 62 per litre for domestic flights taking off from Dhaka and by 9.83 per cent to Tk 61 per litre for flights from Chittagong. This is for the third time the BPC has slashed the A-1 jet fuel price in 2015. 
Local aviation analysts say it is good to see that the government has reduced the jet fuel prices. But the extent of the price cut is not sufficient, they said, adding that the cut should have been much extensive to ensure competitiveness of local airliners with the foreign ones.
With the price cut in jet fuel, it is expected that all airliners operating domestically and internationally from the country will reduce airfares in line with the price cut.
Earlier, Prime Minister Sheikh Hasina gave a broad hint that oil prices might not go down in the country as the government still needs to redeem a huge amount of losses that was incurred while paying subsidies for oil imports. The comment of the Prime Minister overshadows the words of hope recently given by Finance Minister AMA Muhith that oil prices might be reduced in line with the falling prices of fuel oil in the international market. 
 When the prices of oil were sky high in the international markets, the Prime Minister said, the government had to subsidise to sell them at a lesser costs in the local markets. The country had to buy in higher prices and sell them locally in lower prices. As a result, the government had to incur a staggering loss of Tk. 380 billion, she told a meeting.
Prices of fuel oil were last raised in 2013 to keep the markets in sync with the international ones. The prices of octane, petrol, kerosene and diesel stand now at Tk. 99, Tk. 96 and Tk. 68 respectively. 
While the finance minister, before increasing gas and electricity prices, had said that the government had plans to review oil prices in September, Planning Minister AHM Mustafa Kamal opposed the plan to reduce oil prices. He said that the prices of oil in the global markets might rise again anytime and the government then would have to increase the prices again. 
In fact, the government had refrained from reducing the prices despite the fall in the international market in the past one year saying the BPC first needed to recover the losses it had sustained over the years because of subsidy. 
Brent crude, the benchmark in oil prices for international market, fell to an 11-year low around US$ 35 per barrel recently from maximum US$ 120 per barrel, according to reports.
On its part, the Power Development Board (PDB) required around Tk 55 billion to Tk 60 billion subsidy annually, while the government, to offset the subsidy pressure, hiked power prices several times in the last three years. 
For now, the government has no plan to reduce domestic oil prices, as it is still watching the situation. In recent years, the country has been spending between Tk 340 and Tk 380 billion per year on importing crude, refined and lube base oil. If oil prices continue to stay at this level, the BPC expects to save 35 to 40 per cent of last year's oil import costs.
Bangladesh now buys refined oil from 10 sources, and only one of them is an oil-producing company (Kuwait Petroleum Corporation or KPC). The rest are oil distributors. The country also buys 1.29 million tonnes of crude oil from two companies -- one from Saudi Arabia and the other from the UAE. Among the suppliers of refined oil, the KPC sells Bangladesh diesel and jet fuel. The BPC also uses the KPC's price as reference price when it buys oil from the other nine companies.
The corporation is now making profit against sale of all petroleum products, as their price in the international market has fallen sharply. If the downtrend of petroleum prices in the international market continues for several more months, BPC could recover its losses, incurred in the previous years. The corporation currently has outstanding debts worth around Tk 40 billion.
Most global forecasts suggest that oil prices are unlikely to go beyond $80 a barrel for next few months because the current level of extraction will remain the same. The drastic fall of oil price in 2014 had its effects on the economies of exporting and importing countries.
Exporting countries lost huge revenues that affected their economies in many ways and on the other hand, importing countries benefited from reduction of their production and output costs. The decrease of oil price is the result of conflicts among oil-producing countries and the invasion of Ukraine by Russia.
Meantime, many economists say falling oil price in the international market should have been a boon for Bangladesh. Usually, lower oil prices helps reduce the cost of living by lowering transport costs and bringing down inflation. Lower oil prices also pass through directly into lower fuel costs and retail electricity prices. But since the government is the lone oil importer, benefit to the consumers depends on lowering petroleum prices in the domestic market, they said.
Petroleum analysts suggest to adjust prices of petroleum products on a quarterly basis. But it is a common phenomenon that if prices go up in the international market, the country does not raise the domestic prices and if international prices go down, it does not reduce the domestic prices. This actually results in subsidy.
Analysts say the government should open the domestic oil market for the private sector to bring quality service in the energy sector and give benefit at retail level. 
Rationalising oil prices in the country through phasing out of subsidies as a result of subdued global petroleum market is expected to ensure savings from lower subsidies that could be used for infrastructure development.
A depressed fuel price otherwise provides leverage for the government to keep domestic fuel prices low which, in turn, would give some respite to consumers, particularly the low and fixed income groups who can then spend their savings on other purposes.                                       

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