Home ›› 28 Nov 2021 ›› Editorial
Dr. Shamsul Alam, the State Minister for Planning, in an exhaustive and compassionate discourse outlined the pros and cons of the recent price hike of fuel in Bangladesh. His view is that the increase in fuel price may accelerate inflationary pressure in the economy. Frequent fuel price change triggers uncertainty in the production process and is now an accepted norm in macroeconomic management. Fuel constitutes an element of major cost in diverse ways and thus puts pressure on the prices of many products with overall effects on the price level. The standard of living drops as inflation creeps in the process. This paper discusses many issues including the viewpoints of major stakeholders, the comparative price of oil in the neighbouring countries and the leverage in the fiscal space.
The higher price of fuel in the context of global scarcity in the midst of the post Covid-19 pandemic recovery is now a crucial subject because of multiple issues related not only to supply chain disruption in the global context but also capturing a vive platform in the context of recently concluded Cop-26 in Scotland, UK. COP-26 with the explicit goal of limiting temperature rises by 1.5 degrees Celsius could provide a headway in reversing the global warming driven environmental disasters in the world. The challenge lies in the responsibility regarding the promised dateline on carbon emission by the major players. The cautious steps on “the phase-out of unabated coal power and of inefficient subsidies for fossil fuels” constitutes the major risk as echoed in the concern of the Secretary-General of the United Nations Antonio Guterres who apprehends unabated trillion dollars subsidies in the fossil fuel industry. His appeal “Every country, every company, every financial institution must radically, credibly and verifiably reduce their emissions and decarbonise their portfolios starting now. “There is an urgency in his call to avert a major disaster for human civilization. However, there is now a dilemma in the decarbonization drive as we observed the trend of massive underinvestment for the last five years into fossil fuels whether it is coal, whether it is oil, whether it is natural gas going to lead to a reduction in the supply of hydrocarbons and fossil fuels for many years to come”. Underinvestment comes as the world focuses on transitioning to clean energy as it seeks to cut emissions. Global consumption of oil has steadily increased over the last three decades. The consumption was 2.2 billion metric tonnes in 1970 but in a decade in 1980 it increased by 1 billion metric tons. The current consumption is over 4 billion metric tonnes. The only decline during this period was observed during the 2008/2009 financial crisis.
Fossil fuels constitute a major source of supply in the event of Covid-19 pandemic recovery of the world economy, the demand already lags behind supply. Oil prices have been erratic in the past few weeks as demand outstrips supply owing to a surge in gas prices and a quicker-than-expected economic recovery in developed countries. An increase in the natural gas prices before the winter season could lead to substitution of higher volumes of oil products in power generation, boosting overall demand. The renewable energy is not fast enough to meet growing demand and lull in investment as promised in the aftermath of COP-26 by major oil producers may aggravate the scarcity. Brent, the international benchmark for more than half of the world's crude, is now over $ 85 and with pent up demand, oil prices may even touch the threshold level of $100 per barrel by the end of this year. This apprehension is well founded as we now observe in the releasing of oil reserves in soothing prices by supply augmentation– supply only to be used in times of shortage in many countries of the world. In order to augment supply in the face of the ensuing crisis. The United States will release 50 million barrels of crude from the US Strategic Petroleum Reserves [SPR] and at the request of the United States, Japan also plans to release from the portion of its SPR. SPR is a buffer for about 90 days consumption in case of dire necessity and is considered as a legal requirement. The supply would be enhanced in the market in mid-to--late December by the simultaneous release of China, India, South Korea and the United Kingdom. “The unprecedented effort by Washington to team up with major Asian economies to lower energy prices is intended as a warning to major producers that they should pump more oil to address concerns of high fuel prices in powerhouse economies.” The world is in the throes of great economic and financial instability now with the resurgence of Covid-19 in major European countries including Germany and Netherlands. My paper on Covid-19: Vivacity of OPEC published on August 22, 2021 in the Business Post may be a supplemental reading for the interested reader in this context.
Empirical research on the impact of crude oil price movements on GDP growth rate and the Consumer Price Index in both developed and emerging economies such as the United States, Japan and People's Republic of China manifests that higher energy prices affect not only the supply side of the economy but also household consumption on the demand side of the economy. The transmission mechanism however is further propelled by the supply side of the economy resulting in higher price level and lower output levels at the final equilibrium point when compared to initial equilibrium. However, the impact of oil price fluctuations on developed oil importers’ GDP growth is much milder than on the GDP growth of an emerging economy. When viewed in the context of inflation we see the opposite result, inflation is milder in the emerging economies than most of the developed countries. The findings reveal an important lesson for the policy planner that fiscal expansion has a smaller effect on inflation than monetary expansion per unit of real GDP or employment generation. Thus, expansionary fiscal policy that often espouses subsidies on crucial production input such as diesel and kerosine may be healing for common people in times of distress and income loss.
The writer is the Treasurer and a Professor at the School of Business and Economics, United International University. He may be contacted at obaidur@eco.uiu.ac.bd
