Fuel price hike

With crude oil prices rising at a fast pace worldwide, let us take a look at what causes and what effects it might have on the economy. As the world economy starts to recover from Covid-19, global demand for crude oil has been rising in 2021 resulting in a sharp spike in prices. Another reason for the sharp increase in oil prices is the supply restrictions maintained by the Organisation of the Petroleum Exporting Countries (OPEC) led by Saudi Arabia and non-members led by Russia. The pace of economic recovery from the pandemic has increased demand at a time when oil production has decreased due to cutbacks from producing countries during the coronavirus.

The rebounding global demand for crude oil has contributed to power and gas shortages in Europe and Asia, boosting the demand for oil for power generation. The fuel price has recently reached the highest level since 2014, and oil-importing countries, including Bangladesh, are feeling the pinch.

Since the beginning of 2021, it has risen nearly by 58 per cent from about US$51.8 per barrel to over US$81. The rise has been sharp over the last several weeks, from US$65 per barrel on August 20. It has been rising steadily from April 22, 2020, when it was US$16 per barrel.

The government has raised the fuel price by 23 per cent last week. This comes five years after it last adjusted the price of petroleum products. The prices of diesel and kerosene have been increased by Tk 15 to Tk 80 per litre, citing a surge in price of petroleum products in the global market.

Speaking at a news briefing, State Minister for Energy, Power and Mineral Resource Nasrul Hamid mentioned reports of oil being smuggled across the border to India whenever there is a significant disparity in the prices of fuel oil emerges between the two South Asian nations. He highlighted India’s readjustments as an example of how neighbouring countries are dealing with the crisis. On November 1, the price of diesel in India was Rs 101.56 or Tk 124.41, which is much higher than the price in Bangladesh, according to the ministry.

In October this year, the state-owned Bangladesh Petroleum Corporation (BPC), the country’s sole petroleum product importer, suffered a loss of over Tk 7.26 billion due to selling diesel and furnace oil at a lower price. The ministry cited the data as the reason for hiking the fuel price.

The government had previously lowered the prices of petroleum products marginally by Tk 3 per litre in April 2016 when Brent crude oil was around US$40 per barrel. The corporation made huge profits. The government’s latest fuel price hike is expected to make the BPC beset with corruption profitable during the Covid-19 which sent millions of middle-class people into poverty and marginalized people into poverty.

When the crude oil prices are low in the international market, it is not understandable why the government was reluctant to cut it down sharply as fast as it did when the crude prices go up in the international market.

Back in mid-2014 when petroleum prices started falling on the global market, the call for adjusting oil prices on the local market had been getting louder. Oil prices plunged by 66 per cent to $27.65 a barrel on the international market. But the government was rigid on the price adjustment to allow the BPC to repay its loans and recoup the losses it incurred between fiscal 1999-2000 and 2014-15. Pressure had been mounting on the government to cut the fuel prices after the BPC had made huge profits during the time.

The World Bank and the International Monetary Fund also pursued the government to deregulate the fuel prices and introduce a system that makes automatic adjustments of prices in line with the international market rates.

BPC imports 50 lakh tonnes of petroleum products a year on average. Of the figure, diesel accounts for 64 percent, furnace oil 17 percent and kerosene 5 percent. The remaining are other products, including octane and petrol.

Of the fuel, 46 per cent is used in the transport sector, 26 per cent in the power sector and 17 per cent in agriculture. Agriculture is mostly dependent on diesel as the sector uses more than 99 per cent of the diesel import.

As far as the implications of rising fuel prices, both microeconomic and macroeconomic have repercussions. As a consumer, we already understand the microeconomic effect of soaring fuel prices.

When fuel prices rise, a lion’s share of families’ budgets may be spent on it, leading to less expenditure on other services and goods. The same goes for industries that need to transport goods from place to place or that use fuel as a key input. A surge in fuel prices will make production expensive for companies, just as they make it more expensive for the low-income group.

It is not a far leap to understand how fuel prices affect the macroeconomy. Fuel price increases are generally thought to stoke inflation and stifle economic growth. Fuel prices indirectly influence costs such as transportation, and manufacturing, contributing to the rise of inflation.

The latest hike has already begun to leave a cascading effect. The transport cost of essential commodities such as food grains and vegetables has already started to increase and is expected to be passed on to customers. Sharp diesel and kerosene price hike is set to burn a hole in the consumer pockets.

The rising fuel cost has also a close link with electricity and gas productions. So the country might see the price hikes in power and gas followed by the latest fuel price hike. At present, power plants run by fuel oil account for around 30 per cent of the total 13.3 gigawatts of installed electricity capacity in Bangladesh.

Bangladesh Road Transport Owners Association demanded and got a rise in bus fares to cover the additional cost of fuel. The kerosene price hike will hit hardest the low-income families and outlets that use the fuel for cooking.

Since Bangladesh imports a major portion of its fuel needs, it requires more dollars to purchase crude oil resulting in a reduction of liquidity. The taka is losing its value against the greenback which will result in imported goods tending to be more expensive. Bangladesh will have to spend more on import bill payments. A rise in petroleum prices might lead to a fall in private investment. Businesses that will fail to pass the production costs on to the consumers will have to take a hit in their profits. If economic policymakers ignore the economic reality of the majority, the situation might be even direr by the time.

The private sector has long been demanding to break the monopoly of BPC to make the market competitive, which goes unheard. Kerosene price is used by mostly poor people hit hardest by the price hike. The cost of production of the factories run by the electricity generated by diesel will increase and bring a cut on profits. Lowering VAT and import on petroleum products imported by BPC may help the government avoid a sharp hike in fuel price.

The writer is Planning Editor at The Business Post. He can be contacted at kamsohel@gmail.com