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Thursday, May 23, 2024

How rising short-term fuel oil prices are the first line of defence?

Heavily indebted countries such as Pakistan and Sri Lanka are already reeling from the effects of high oil prices. Pakistan's new Prime Minister, Shehbaz Sharif, removed fuel subsidies and raised petroleum prices to Rs 248.74 per liter for petrol and Rs 276.54 for diesel. This is the fourth time petroleum prices have been raised in a period of 1–1.5 months.

Amid the fluctuations in petroleum prices in the international market and exchange rate variations, the Bangladesh government in a sudden move made an upward revision of the retail prices of all fuel oils at the consumer level. It hiked fuel prices by around 50% percent, the highest in the country’s history, a move that will trim the country’s subsidy burden. An official statement from the ministry of power, energy, and mineral resources noted that Bangladesh needed to readjust the prices following an uptrend of fuel oil prices in the global market in the current world situation driven by the ramifications of the Russia-Ukraine conflict. Earlier, the state minister for power and energy hinted that people in Bangladesh are likely to pay more for fuel, oil, gas, and power to a “reasonable” level in line with the world market.

As per the new prices, a liter of octane now costs Tk 135, which is 51.7 percent higher than the previous rate of Tk 89. Similarly, each liter of petrol now costs Tk 130, a rise of Tk 44 or 51.1 percent. The price of each liter of diesel and kerosene has reached Tk 114 from Tk 80. As the news spread, hundreds of people thronged the refueling stations across the country, hoping to buy fuel before the new rates took effect. But the station authorities stopped selling fuel, creating a chaotic situation among the people.

Read more: Be ready for another increase in fuel prices!

Understanding the matter better

If we look at the current global economic scenario, we may easily understand that the government had to take the tough decision to bring the economy back on the stabilization path. In a webinar titled “Fuel Price Hike: Upcoming Impact”, Energy Secretary Md Anisur Rahman opined that if the decision was not taken, the next shipment of fuel imports could have stopped, which would have then triggered a major crisis. At a seminar organized by the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) on August 4, businessmen suggested raising fuel oil and power prices to ensure an uninterrupted supply.

The price hike, undoubtedly the highest since independence, will cause further inflation, creating pressure on the economy, but the energy ministry had no option but to push for a rise in prices due to a crunch in foreign currency reserves and high prices in global markets. Due to protracted low investment in global oil production, a pick-up in demand related to economic recovery from the COVID-19 pandemic, and finally the Russian invasion of Ukraine on February 24, 2022, crude oil breached US$130 per barrel in March 2022 — its highest level since 2008 — before retreating to US$100 per barrel in April.

In such a case, despite the government’s desire to maintain petroleum product prices at a reasonable level, it has to shift the burden to consumers for a short time. Considering the uptrend of fuel oil prices in the global market, several countries of the world including those in Bangladesh’s neighborhood, are regularly adjusting the price of fuel oil. In India, fuel prices fluctuate in response to global price fluctuations, whereas in Bangladesh, fuel prices have remained constant for about five years (April 2016- November 2021), despite a 45 percent increase in global crude oil prices from $81.6 per barrel to $118.5 per barrel during the same period. In 2016, petrol prices saw a Tk 10 cut to Tk 86 per liter and diesel prices by Tk 3 to Tk 65 per liter after a slump in global oil prices.

Past experiences show that thousands of barrels of fuel were being smuggled through the border due to the low price in Bangladesh. That’s why, if Bangladesh doesn’t adjust petroleum fuel prices, there is the risk of smuggling costly fuel to the neighboring countries, as petrol and diesel prices have continued to remain high in India and Myanmar. The price comparison clearly shows that prior to the hike, petrol and diesel were TK 34.09 and TK 44.42 cheaper in Bangladesh than in India. This price mismatch might cause the smuggling of costly fuels through the border. Moreover, an artificial crisis may be created and common people might be deprived of the proper quantity of fuel oil as a result of smuggling.

Read more: Miftah Ismail denies link between fuel price hike, IMF accord

It is expected that the recent fuel price adjustment will stop fuel smuggling

Most significantly, where every penny is important for economic stability in a broader sense, an adjustment to the global market is imperative to avoid huge losses. Bangladesh Petroleum Corporation (BPC) has reported a loss of Tk 80 billion from February to July by selling fuel at a low price. It is reported that the government suffers losses whenever fuel oil prices rise above $70 per barrel in the global market as it subsidizes the prices to keep the cost of living down.

It should be noted that until yesterday, the lowest petroleum prices in the region were in Bangladesh. Because, while the neighboring countries didn’t give much subsidy and the prices of energy have increased many days ago, Bangladesh has given a six billion dollars subsidy to the energy and power sectors last year and maintained quite low fuel prices for several years. However, one way of answering the present price growth issue is to look at the prices in comparable countries or in the region.

Approximately 85 percent of India’s oil is imported. Though the Indian petroleum industry is much larger and more efficient than other South Asian countries, and the country is also getting 30 percent cheaper crude oil from Russia, global crude oil prices and the dollar/rupee exchange rate affect the pump prices. According to a report by the Observer Research Foundation (ORF), a New Delhi Think tank, between March 2014 and October 2021, the Indian government-imposed tax on petrol rose by more than 200 percent and that on diesel by more than 600 percent. In New Delhi, petrol, and diesel prices stood at 120.51 rupees and 104.77 rupees, respectively. It is to be noted that Bangladesh has long maintained reasonable import taxes even though they are a crucial source of government revenue.

Heavily indebted countries such as Pakistan and Sri Lanka are already reeling from the effects of high oil prices. Pakistan’s new Prime Minister, Shehbaz Sharif, removed fuel subsidies and raised petroleum prices to Rs 248.74 per liter for petrol and Rs 276.54 for diesel. This is the fourth time petroleum prices have been raised in a period of 1–1.5 months. Cash-strapped Sri Lanka is charging the regional maximum price (Tk143.51) for petrol per liter while Nepalese are paying the second-highest price amounting to Tk136.27.

In such a bleak scenario, there are very few options and prospects for most of the governments of developing countries. However, there is a possibility that the oil price may go down in the global market and the Taka may get strengthened as remittances are responded to in a positive manner on July 22.

Read more: Bike assemblers increase prices after fuel prices surge

Though the new price of petrol is still lower than in neighboring India, Nepal, Pakistan, and Sri Lanka, we must accept the fact that extra fuel prices will undoubtedly add to the plight of ordinary people already struggling to cope with the rising cost of living. But from an economic perspective, the fact is that adjusting the price is a rational and reasonable one. However, the government must reconsider the prices once the situation returns to normal. If the government cuts the tariff due to a price fall in the international market, people will not raise any questions. Similarly, the government must take strict legal action if anyone creates an artificial fuel crisis or sells fuel at a higher price to protect the poor from such excruciating prices.



The writer is a Political-economy Analyst in Dhaka, Bangladesh. The views expressed in the article are the author’s own and do not necessarily reflect the editorial policy of Global Village Space.