Business

Petroleum players should pass on benefits to consumers

FLASHBACK: Workers at total service station on Church Road in Lusaka going on with their business.

ESTHER MSETEKA, Lusaka
IS THERE a big disparity between global oil prices and Zambian fuel pump prices? If there is, is it a cause to worry?
These are questions that deserve honesty answers!

Last week, Energy Regulation Board (ERB) announced a reduction in pump prices with petrol now selling at K11.67, representing a 6.64 percent drop from K12.50 per litre while diesel is fetching at K9.87 per litre from K10.72 translating into a 7.93 percent reduction.

The price of kerosene has dropped to K6.50 per litre from K6.81 and that of low sulphur gas is selling at K12.16 per litre from K13.01.
In determining the prices, ERB uses the cost plus pricing model, which operates on the principle that the final price of petroleum products should cover all costs incurred in the supply chain.
Wholesale and pump prices are determined based on the cost of each feedstock cargo received and the cost of each feedstock cargo is mainly affected by global crude oil prices and the exchange rate of the Kwacha to the United States (US) dollar.
ERB explains that reduction in petroleum products has been necessitated by excess supply of US dollar inflows from offshore investors who subscribed to government bonds leading to the appreciation of the local currency.
Other attributes include the increased copper prices on the London Metal Exchange which are trading above US$6,300 per tonne enabling mining companies to meet their tax obligations by converting foreign currency to Kwacha.
The Kwacha has in the past few weeks appreciated to below K9.00 against the US dollar, from a high of K14 per dollar in November 2015 while inflation rate stands at 6.6 percent.
During a media briefing, ERB board chairperson Raymond Mpundu explained the reduction in prices is due to economic fundamentals Government is implementing.
“This price adjustment takes into account refined petroleum products that have been imported since January 2017. Fundamentally, the cost of this importation has to be recovered in full,” Mr Mpundu says.
But the searching question will be whether the positive effect of the well-intended measure by Government is yielding benefits for its citizens.
It appears for some reason that there seems to be reluctance, if not unwillingness, on the part of the various stakeholders involved in the petroleum value chain to pass on the much-needed benefits to consumers.
Consumers expect, for instance, bus fares to effectively drop, prices of basic commodities and indeed all goods should also be reduced since there seem to be no justification for maintaining high prices when a key determinant such as fuel prices are now reduced.
Failure to reduce prices will be interpreted as bad business practice (unethical business conduct) or unpatriotic.
In January 2010, volumes of petrol that was worth US$100 in Zambia, increased to US$212 in June this year, representing 112 percent rise.
Similarly, US$100 worth of diesel in January 2010 was worth US$194 in June 2017, representing a 94 percent rise.
From these figures, it is easy to deduce that the cost of living has become high owing to the fact that human existence depends on fuel.
It is easy to notice that prices of commodities have doubled in the past few years and the burden has been shouldered by consumers across the economy.
As such, any action to lessen the burden such as a seven percent reduction in fuel prices should be supported by all especially, that this government is implementing a pro-poor agenda.
Action to the contrary, might mean frustrating government intentions to cushion high prices of commodities.
Although the reduction may look marginal to some people, neglecting to reciprocate on the part of other stakeholders such as traders will seriously hurt the economy over a long period.
Assuming Government reduces pump prices by the margin they have done (seven percent) over a period of seven years, and there are such four reduction cumulatively, it will be about 28 percent with huge benefits.
This is important to consider because government measures are not only short-term but also long-term, so it is important for players in the economy to support this intervention by passing on the benefits to people.
Failure to do so will be seen as a desire by the players in the economy to enrich their pockets!
While the move by Government to reduce the cost of fuel is commendable, Zambia Institute for Policy Analysis (ZIPAR) senior research fellow Ceaser Cheelo thinks addressing the procurement process should start at Indeni Refinery.
“Zambian consumers will continue to suffer from high fuel costs despite the global oil price declining and the big culprit in this story is Indeni Refinery. Therefore, part of the solution will be to seriously reform Indeni,” Mr Cheelo notes.
Over 50 percent of Zambia-bound fuel comes as crude oil from the Middle-East and first goes to India for “cracking” then recombined for easier transportation. Co-mingled stock is then shipped to Tanzania and piped to Indeni in Ndola, Zambia.
The Middle-East-to-India-to-Indeni arrangement is inefficient, unreliable and very expensive.
Therefore the “Indeni way” thus explains, to a large extent, the costly fuel at the pump price in Zambia.
However, for the citizens to benefit from economies of scale, there is need to address the disparities on the inefficiencies inherent in the Indeni way of buying fuel and production process which imposes underlying cost.

 

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