INTRODUCTION (DRIVERS OF GLOBAL PRICES)

The sporadic prices of petroleum products in Ghana has generated a litany of debates amongst government, civil society, regulators and petroleum traders and association. The disproportionate nature of these prices is hard felt within the broad stream of economic classes. Prices of petroleum products all over the world are either determined by regulatory regimes (sometimes fuel subsidies) or deregulatory regimes (other times market forces). Global petroleum prices are dictated by certain macro-factors for which various governments have no control over. Notable factors include growth of global oil demand, increase in speculative transactions and rise of risk premiums, decline in oil production capacities (peak oil), fears of supply disruptions and cost of oil production.

However, in Ghana, one of the pivotal factors that determines a change in the prices of petroleum products are depreciation of the cedi, huge taxes and high inflation rate. It is however important to note that current oil price fluctuations in the country are largely due to poor performance of the local currency in forex market.

Ripple effects of fuel price hikes on Ghana?s economy mostly compels the government to introduce fuel subsidies to regulate them. When oil prices are increased, it triggers upward adjustments of all items in the market. It affects transport fares, prices of basic commodities and cost of production. Despite this, the introduction of subsidies by succeeding governments always lead to under recoveries due to their inability to honor their part of the subsidy bargain.

Much as the recent brouhaha surrounding the deregulation of Ghana?s downstream petroleum sector, it is perceived by some as a novel initiative aimed at biding farewell to the subsidy regime, it is important to note that the promulgation of Act 691 of The National Petroleum Authority (2005) set in motion the deregulation regime. Within this Act, the NPA is mandated among other things to promote fair competition among petroleum service providers, monitor international and domestic petroleum production, supply and demand, fixing prices of petroleum products inter alia. The Automatic Price Adjustment formula was therefore brought in to achieve fuel prices parity. Which in its entirety was not followed to letter.

What the above stipulations convey is an already deregulated downstream petroleum sector that begs the question of whether the proposed NPA bill 2015 before parliament constitutes an upgrade of the current act, or a further extension of an on-going deregulation of the downstream petroleum sector? On the face value of the current proposition and commentary surrounding the debate, the Energy Policy and Research Institute (EPRI) fears for a duplication of statutory mandated roles, multiple regulations as well as cloudy operations that may be inimical to the end-user at the pump station.

Let us take the argument of the NPA ceding off the price determination aspect of regulation to Oil Marketing Companies (OMCs) for instance, albeit the NPA?s position that it would set price ceilings for the OMCs to work within, this may have the tendency of creating a multi-regulatory regime for the downstream petroleum sector. Many may proffer the point that the setting of a price ceiling for the sector by the NPA will allow the OMCs to adequately respond to the demands of the market forces.

The reality that the proponents of this school of thought may however be oblivious of is the fact that petroleum products and a commodity like a tin of milk or utilities such as mobile phone tariffs, that swing on supposedly neoliberal market forces are diametrically opposed in functional economic and market force properties. As an individual consumer may have the choice of purchasing a tin of milk over the counter from different vendors based on price which is a much more rational decision to make; same as one would do in the selection of a service provider for mobile phone usage and petroleum products. The differences in these choices however lies with an easy will of changing sellers’ tins of milk based on prices, always shopping and opting for the lowest price. In the instance of choosing a mobile phone service provider, this choice may not be as easy as that of a tin of milk, as in this instance factors such as price volatility and ?staying with contacts? may inhibit a switch.

Take a scenario of OMCs controlling prices within a capped ceiling by the NPA, regardless of this capped ceiling, the different prices displayed by the various pump stations might not offer a free ?wheeling? choice as other commodities. Within this space, price differences among the various pump stations dotted around the country may just be so infinitesimal so as to trigger a change in choice for customers. Also, it would be practically impossible for a consumer with a near empty tank to afford the luxury of a low price search. Rational as it may be for consumers to factor in planning, the intrinsic nature of man may act against rationality in this regard. Since the announcement of the deregulation process for example, Ghana Oil Company (GOIL) has been perpetually loud in the advertisement of low prices peg. Will this therefore mean that every rational consumer of petroleum products must always be in search for GOIL to meet his/her demands?

THE AIM OF THE REGULATORY REGIME (FUEL SUBSIDY)

The aim of introducing fuel subsidy is ?perceived? to serve the public interest. In the world over, various governments in a bid to cushion the underprivileged or the poor in the society introduce fuel subsidies. The main purpose of subsidies is therefore to avoid spiral inflation and protect citizens from the negative effects of price increases, implying that the subsidies afford the consumers an opportunity to buy fuel below its global market prices. It is therefore, a perceived pro-poor policy that helps to keep poverty levels stable. Developing countries including Ghana introduce subsidies to keep the prices of basic commodities artificially low for the perceived poor. The proponents of fuel subsidies contend that fixing prices out of the government control may be detriment to the masses.

SUBSIDISED ARREARS IN THE GHANAIAN ECONOMY

Areas of the Ghanaian economy that mostly receive huge subsidies include fuel, utility and agricultural sectors. The subsidies normally take the form of a price cap or preventing oil companies from charging too much at pump stations. It can also come as a tax break to domestic oil producers, which then usually passes on the savings thereof. In both cases, the government has to cough up huge sums of money to pay the price differentials.

DOES THE SUBSIDY REGIME REALLY BENEFIT THE POOR?

The hydra headed question however is “has this regulatory regime really benefited its target beneficiaries over the years?” The answer is a big NO. Contrary to popular belief, it is rather the wealthy that disproportionally benefit from fuel subsidies. The benefits mostly end up swelling the fortunes of the middle and upper classes to the disadvantage of the poor.

Energy Policy & Research Institute (EPRI) therefore, views subsidies as a venture that if not properly implemented will benefit a handful of Ghanaians. As it has been established, the government’s fuel subsidies as a social intervention scheme is, most often than not, ill-targeted or misplaced. It only succeeds in accumulating huge debts in most state institutions and stifle their long-term financial objective, making it a perennial trend that the taxpayer has to shoulder for longtime running.

IS THE DEREGULATORY PRICING REGIME POSSIBLE IN GHANA?

In view of the illusive benefits of regulated pricing which manifests itself through subsidies. Subsidies could be described as defective. Cutting off subsidies in the face of Ghana?s economic challenges would therefore allow the government to spend more on infrastructural developments.

The deregulation regime that has commenced since 2005 in the downstream petroleum sector is welcoming news. Successes such as inclusion of private oil players, Bulk Distribution Companies (BDCs) and Oil Marketing Companies (OMCs) in the trading of oil in the country has been achieved. A critical mandate however that remains a sticky issue is price liberalization. Hence, the NPA (Amendment) Bill, 2015 to give legal backing to the deregulatory price regime.

The logic of price liberalization is to allow the prices of oil to be driven by market forces. Simply put the removal of all forms of government interventions in the pricing of petroleum products. This therefore means that government rules and regulations governing the prices of petroleum products are relaxed for the OMCs to decide on their own optimal prices through market forces.

Indices such as global fuel prices, performance of the cedi and fuel taxes are used by the OMCs in setting up prices. However, the NPA has the residual power to set up and monitor ceilings on the prices within which various prices should fall under. Under the new deregulation bill before parliament, the NPA would become a hub to monitor activities of OMCs to ensure that customers are protected from undue price hikes.

The aim of the deregulation is therefore seen to be one that is in to blow off the subsidy cover. Many countries including Argentina, Australia, Canada, United Kingdom, and New Zealand have successfully deregulated their respective downstream petroleum sectors with tremendous economic benefits. On 28th July, 2015, United Arab Emirate, the third largest oil producing country, announced her intention to also deregulate the downstream sector. It will see an increase in gasoline prices by as much as 24 percent in early August. When this is successfully implemented, U. A. E. will become the first country in the oil-rich Persian Gulf to regulate its downstream sector.

However, the success in Ghana?s deregulation would depend on how to balance economic reality with political expedience. Various governments lack the necessary political will to implement it entirely for fear of political backlash. Bold decisions are needed for our economic growth. It is high time to take the bull by the horns to sanitize the pricing regime.

BENEFITS OF DEREGULATION IN GHANA

Cognisance of skepticism as far as deregulation is concerned (evident in the introduction), we are aware of the notion that setting economic prices in the downstream petroleum sector has many benefits. It has the potential of ending occasional shortages of fuel in the country, thereby maintaining availability of fuel all year round. If the deregulatory regime is effectively managed, persistent fuel shortages and fear of long queues at pumps stations will be a thing of the past.

The fuel subsidy regime in Ghana creates huge debts and deprives the OMCs the needed capital for effective and sustainable business operations. For example, as of 18th June, 2015, BDCs claimed that the government owed them an amount of GHc 3.4 billion which is largely due to forex exchange losses, price under recoveries, higher interest rates and fuel subsidies. It is therefore clear from the government’s huge indebtedness to the BDCs that securing letters of credit from the banks for petroleum imports will be extremely difficult for marketing companies. The situation will be different under the price liberalization programme.

Price liberalization also opens up the market for competition. It enables oil stakeholders and private oil marketers to import and market petroleum products that would in the long run be beneficial to the consuming public. For example, following government?s deregulation in the telecommunication industry, there has been intense competition leading to a reduction in call tariffs. The price regulatory regime hitherto deprived OMCs needed financial muscle and capacity to be competitive in the downstream market. Deregulation would create a level playing field to attract new entrants and private investors into the sector.

More so, due to the low prices of the petroleum products under the subsidy regime, smuggling of fuel to neighboring countries has increased. For example, while a litre of gasoline costs $1.04 in Ghana, it costs $1.17 and $1.19 in Ivory Coast and Burkina Faso respectively. Smuggling has therefore become an obstacle associated with the downstream petroleum sector in Ghana. Border towns such as Bawku in the north, Elubo in the West and Aflao in the East have therefore become hubs for smuggling refined petroleum products across borders in neighboring countries. These cities are regarded as the most lucrative fuel smuggling centers in the country.

According to an investigative piece by the New Crusading Guide (2013), out of a stock of ten tankers dispatched weekly from the Buipe fuel storage facility to Bakwu, only three tankers get delivered, with the rest finding their way into Burkina Faso through smuggling. This was as a result of low prices of the refined petroleum products in Ghana as compared to Burkina Faso. As early as 2013, a gallon of petrol was GHc 9 while the same gallon of fuel is sold at about CFA3000 an equivalent of GHc 10. This allowed the smugglers to cash in at least GHc1 profit per gallon of petrol. Smuggling therefore costs the country dearly in terms of fuel loss and decline in revenue. A main aim of the liberalization policy is to help eliminate the incidence of these smugglings that is causing the country so much. Price liberalization therefore becomes disincentive for smugglers.

Furthermore, when fuel subsidy is removed, the government?s hands will be free to invest the amount into other sectors of the economy. Instead of selling petroleum products at subsidized prices, the amount should rather be channeled into other sectors for basic infrastructural developments across the country.

RECOMMENDATIONS FOR EFFECTIVE DEREGULATION REGIME

The dollar is the ?de facto? determinate in the pricing of petroleum products. A weaker local currency therefore means further increments of fuel prices and vice versa. It is therefore, suggested that managers of the cedi should take stringent measures to stabilize it in order to prevent perennial increments as a result of foreign exchange losses. Ghanaians will benefit tremendously if the forex is managed more effectively. It is sad to note that recent price hikes are as a result of the wobbling nature of the cedi. Government should therefore put prudent measures in place to effectively strengthen the local currency.
Another important consideration has to do with the issue of transparency in the price build up. The National Petroleum Authority (NPA) should have an active role in the deregulatory exercise. This is absolutely necessary in order to prevent cartels emerging among the OMCs. Much as it would create economic sanity in the downstream sector, it could also be an avenue for profiteering and exploitation by them.
The recent tango between the Chamber of Bulk Oil Distributors (CBOD) and OMCs over the right percent reduction of fuel prices could erode public confidence in the deregulation process if the NPA does not take the leadership role. While the CBOD insisted that the prices of petroleum products should have been reduced to about 26%, the OMCs could only reduce it by 15% insisting taxes are to be taken into consideration. It is however, refreshing that the NPA Bill will give it power to monitor ceilings on the prices of petroleum products to ensure public interest is protected.
The recent reductions of petroleum prices have brought some credibility and integrity to the deregulation process. Skeptics previously viewed it as an avenue for frequent fuel price hikes. Hence, grooming trust, credibility and transparency are absolutely necessary if the deregulation exercise is to be successful and endorsed by the public.
However, the current situation where the fuel-consuming public does not know the pricing ceiling leaves much to be desired. Price indices and stakeholders such as Bulk Distributing Companies (BDCs) and Oil Marketing Companies (OMCs) should be strictly monitored and scrutinized by the NPA to prevent overpricing. As part of its minimal regulatory role and to foster public trust, the NPA should publish petroleum price indicators weekly or bi-weekly to promote the spirit of transparency and enhance its integrity.
Also, cognizance should be given to the emergence of recalcitrant pump stations’s operators who in the name of competition might result to the sale of adulterated fuel so as to meet market competition. This if not properly monitored might saddle end users of petroleum products with some unhealthy consequences.
The importation of petroleum products from the international market does not auger well for a strong local currency. This practice puts enormous pressure on the cedi. The government should therefore, do everything within its power to recapitalize Tema Oil Refinery (TOR) to maintain its operational efficiency and reliability. TOR has the capacity of generating about $300m revenue monthly from its operations. Its optimal operations therefore, have the tendency of reducing the high demand for the dollar.
Conclusively, EPRI is of the high opinion that, instead of completely facing out subsidies, an alternate social intervention could be the introduction of a national public transportation system. Where designated routes would either be put in private hands or better still in the hands of MMDAs ? with regulatory controls in the hands of the government. In this case, any unprecedented hikes in the prices of petroleum products, which is usually accompanied by unsanctioned increases in transportation fares, and occasioned by a mass of quasi-regulated private individuals, who serve as operators of this vital sector (transportation) would usher in some control measures ? with a fit for purpose, social cushion tailored at the all-encompassing lower, middle and upper classes.

The sort of routine where these quasi-regulated transport owners who would usually respond to any increase in the prices of petroleum products (marginal/substantial) without adequate and proper consultation with relevant stakeholders invariably determine the prices of other basic necessities as milk, soap, water, just to mention but three.

This effect of petroleum prices change has become a monotonous act that burdens each and every one of the about 27 million Ghanaians. This practice of ?petroleum-price-response? by Ghana?s informal transport sector where transport fares would increase at the slightest increase in prices of petroleum products with no decrease even when prices go down, comes across as practices that is in to stay. Hence, it begs the urgent call for controls. The question therefore to ask is should we work towards a total eradication of subsidies or lookout for subsidy alternatives?

SOURCE::
Sharif Mahmud Khalid Mustapha Iddrisu
Director of Research Energy Policy Analyst
0544080196 0244849713

Energy Policy & Research Institute (EPRI)
Osu-Accra

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