Was price hike of fuel oil inevitable?

Bangladesh economy is now bleeding for many reasons. Price spirals of essentials, inflation, and energy crisis have made life miserable not only for the lower income group but also for the entire middle class. Price increase of liquid fuel, CNG and power at this critical moment may serve further blow to the middle class and poorer citizens of Bangladesh literally living hand-to-mouth. Price of essentials and transport fare will inevitably increase. Cost of production of export commodities will further increase striking severe blow to competitiveness of export commodities. But the ongoing financial crisis and added costs associated with import of liquid fuel left very little choice for the government to hiking the price of fuel oil. Conspicuous anomalies are also being found in the actual extent of subsidy. But government sources are claiming that it still has to account for Tk 110 billion in subsidy even after price hike requiring further price increase. After increasing price of liquid fuel in two stages, the price of diesel and kerosene are nearly at par with the import price. Petrol, octane and furnace oil are now being sold at prices higher than the import price. A major portion of Bangladesh Petroleum Corporation's (BPC) subsidy is accounted for meeting post-import costs. Among these are different government taxes, internal transportation costs, operation costs of BPC, system loss, profits of dealers and sub-dealers. But BPC now seems to be playing hide-and-seek about the actual post-import costs. There are serious anomalies in the so-called huge subsidies. Hence, the government press release announcing of Tk 110 billion subsidy raises more than a few eyebrows. The BPC chairman informed the media that after the latestprice adjustment, BPC still faces about Tk 100 million in operating loss. Price of fuel is calculated adding VAT, tax, internal transportation costs, BPC operating costs, profit margin of dealers and sub-dealers. Mere import cost is not all. He, however, avoided comment when asked whether exemptions of all government tax and VAT would be enough to get out of subsidy. Sources in the Energy and Mineral Resources Division (EMRD) state that BPC had operating loss of Tk 81.98 billion last year. The finance ministry has already paid Tk 57.91 billion. So BPC is yet to get Tk 24.07 billion subsidy against its losses of last year. This year due to increase in demand, BPC losses also increased over the first quarter of 2011 to Tk 40 billion. BPC takes loans from commercial banks to buy fuel from the international market. The loan is paid back from the sale proceeds of fuel. To overcome cumulative losses due to selling at lower price and not getting subsidy of the government in time, BPC is spending the profits of oil marketing companies to pay back loans and buy fuel again. EMRD sources confirmed that due to financial crisis the government cannot pay subsidy on time. Consequently, the BPC is always under financial stress. The energy secretary in his summary to the prime minister proposing price increase of fuel has stated the financial stress of BPC. It has been learned from EMRD sources that if fuel price could be increased by Tk 1.0 per litre at the beginning of the financial year, the BPC earnings could increase by Tk 7.0 billion. In September and October, in two phases the price has been raised by Tk 10 per litre. Hence, the BPC should earn about Tk 30 billion by year end. But the government did not take into account the inflation following the price hike of fuel. Although the government has initiated several actions to counter inflation, yet price hike of fuel will increase cost of living further. The IMF loan covenant requires the government to do away with subsidy. The ministry of finance has advised the energy ministry to increase fuel price by Tk 14 per litre in three steps. The finance minister also informed about removing all subsidy on fuel. This clearly indicates that the government will soon increase fuel price another time. From the fuel price increase in two steps, it is evident now that all the subsidy goes for VAT, tax, internal transportation, BPC operating costs and profit of dealers and sub-dealers of BPC. The BPC's system loss and pilferage are not at all discussed. These will remain in the dark as the government has resorted to increase the fuel price. In the Asia Pacific and Gulf region, fuel price has been increased on October 31 based on the international market prices. Premium (insurance, suppliers credit, transportation costs) is added with the market price. The costs for reaching petroleum to Chittagong for diesel will be US$ 127.32 per unit of barrel (bbl), for kerosene $129.45bbl, for octane $122.81bbl and for furnace oil $703.53metric ton. The BPC opens letters of credit (LC's) at a conversion rate of Tk 74 for one US dollar. According to International standards, considering 1.0 bbl is equal to 159 litres, import cost of diesel comes to Tk 59.25litre, kerosene 60.24litre, and octane Tk 57.10litre. Considering one metric ton is equal ro 1.082 litre, import cost of one litre of furnace oil comes to Tk 48.11. After the latest price hike, diesel and kerosene are being sold at a price higher than Tk 56 per litre, with diesel at Tk 3.75 and kerosene at Tk 4.24 less than the import price. On the other hand, octane, petrol and furnace oil are being sold at prices higher than the import price. Octane is sold at Tk 31.85 and petrol at Tk 7.90 per litre above the import price. Furnace oil is sold at Tk 6.89 per litre above the import price. The press release of price increase mentions that the government will not require to pay any subsidy if selling price is fixed at Tk 72.39litre for diesel, Tk 72.31 litre for kerosene, and Tk 59.97 litre for furnace oil. About Tk 0.93 per litre from imported fuel goes to government as tax. It is required to pay different types of VAT on imported fuel. These are major sources of revenue for the government. The government, on the one hand, earns revenue from BPC and on the other, pays it subsidy. The government has to pay more subsidies if BPC suffers greater loss. The BPC is reportedly playing hide-and-seek about the post-import cost of fuel. The government has admitted about earning profit from petrol and octane. A large portion of fuel comes from crude oil. Processing imported crude in refinery and use of refined products is much more economical. But our lone refinery capacity is very negligible compared to our huge demand. For silly reasons, the government did not take credible initiatives to set up more refineries in Bangladesh. Perhaps the oil mafia syndicate is influencing the government in not doing that. The fuel market has become volatile recently due to import of substantially higher volume of liquid fuel for rental plants and failure in taking credible actions to set up base-load large local fuel-based power plants. The government policymakers have been misguided by opportunistic groups in pursuing the wrong strategy. Now for generating 2,000 megawatt (MW) power generation about 2.0 million metric tons of additional imported fuel is required annually. Just one year back, demand for liquid fuel was 4.0 million metric tons. It has now increased to 6.8 million metric tons. The government must have thought about adverse consequences of providing subsidy prior to adopting liquid fuel-based rental power plant projects in such generous manner. It now appears that the government jumped into it without doing any proper homework. The government press release stated that fuel price over the last one year increased significantly in the world market. The Bangladesh taka has also depreciated by about 10 per cent to the US dollar. Consequently, the financial strain and losses of the government will cumulate to unbearable level this year. Hence, the government has to account for huge subsidy to continue importing liquid fuel. This is something that the government cannot afford. Other essential development activities may need to be squeezed if subsidy at the present level to BPC needs to be sustained. On the other hand, increased borrowing from banks will affect private investment. On the backdrop of above government readjusted fuel price at consumers level by Tk 5.0 per litre, prices of diesel and kerosene has been increased to Tk 56 per litre, octane to Tk 89 per litre, petrol to Tk 86 litre and furnace oil to Tk 56 per litre. The BPC in the last financial year recorded a loss of Tk 82 billion. The government provided Tk 57.91 billion as subsidy. Government may require paying about Tk 11 billion subsidy even after the latest price hike. Despite the latest fuel price increase, the price of diesel is Tk 14.00litre and petrol is Tk 31.00litre less than in neighbouring India. People of Bangladesh must realise that Bangladesh does not have domestic crude oil production. It has to import either crude oil for processing or finished products to meet our demand. Oil price fluctuates in the world market for many reasons. Bangladesh has failed to plan the proper economic utilisation of its own basic fuel resources like gas and coal. If it could do that then dependence on imported fuel would have been reduced to a large extent by this time. But a very strong oil and energy mafia syndicate misguided successive government policymakers in refraining from adopting appropriate initiatives for exploring and exploiting our own energy resources. Even now, a particular group is influencing policymakers to import coal and liquefied natural gas. Can a bleeding Bangladesh economy afford that? The fuel price hike was inevitable. The government should have done extensive homework before jumping into massive liquid fuel-based power generation. Coal mining should have started by end 2009 at Brapukuria and Phulabri by open-pit method and work on mine-mouth coal-based power plants should have started by now. The government also failed to explore and exploit gas resources as per requirement and advance gas-based power plant initiatives credibly. Now with only about two years and a bit left in its tenure, it will be interesting to observe how the government proceeds from here. Engr Khondkar Abdus Saleque can be reached at Email: khondkar.saleque@gmail.com