The government has kept oil price high in domestic market despite a large fall in global market. The price of per barrel crude oil declined from $115 in June 2014 to $46 in January 2015 that uptrended with ups and down to $ 66 in May 2015. However, an unadjusted domestic price turned the ever-loss-maker Bangladesh Petroleum Corporation (BPC) into a profit-maker. The corporation is reported to have moved out of its loss margin of Tk. 5.0 per litre for diesel in July 2014 and earned same rate of profit in December 2014. The BPC increased its whopping profit to Tk. 15 per litre of diesel in April 2014 which was as high as Tk. 36 per litre for octane. The BPC has so far earned Tk. 20 billion in profit that will come to Tk. 34 billion at the end of 2014-15. It will continue to make profit as long as oil remains cheap in global market. The simple economics behind keeping high domestic price was capital accumulation to BPC so to repay its debts of Tk. 34 billion with three state-owned banks. What is the economic impact of overpricing oil in the long run for capitalising in state-owned BPC, is a critical question.
Let's look at the effect of a decision of cutting oil price in domestic market. Any drop in oil price will raise the demand for oil, which will contribute to domestic production and, in turn, will raise real Gross Domestic Product (GDP). The microeconomic theory explains that oil consuming firms and enterprises would achieve technical efficiencies through a cut in cost of production. China and a few other fast growing economies are taking benefits of global cheap oil. However, a government agency in Bangladesh is making profit with high oil price which is comparable to earning public revenue. A cut in oil price is like a cut in tax which will raise real GDP following an increase in real consumption. Bangladesh economy is expected to grow at a multiplier effect of around four times of BPC's profit, according to macroeconomic estimate. Such dynamics in economic activities should be a priority option in our developing economy. Why the government prefers BPC's savings with oil business, is a matter of discussion.
Some economists thought this large fall in oil price in global market as a year-over-year fall. In view of that, unadjusted price was somewhat accepted in the short-run because any cut in oil price in domestic market might not ease inflation but any hike after interim-drop would cause inflation. However, oil remained cheap in global market over a year and was forecasted not to be dear soon. The International Energy Agency (IAE) forecasted an average price of $55 per barrel in 2015 which will rise to $73 by 2020. On the other hand, oil price will not be up for any plunge in production from world peak oil. This peak oil was stated as a situation of maximum oil production leading to a decline and British petrogeologist Colin Campbell predicted it to appear in 2010. Meanwhile, world's oil supply increased from 85 to 93 million barrels a day during 2009-2014. Moreover, the IEA forecasted global capacity to expand by 5.2 million barrels a day by 2020 that also made the peak oil model dubious. There is no recent forecast on any large hike in oil price in global market. Accordingly, an adjustment in domestic price would not lead to any loss of the BPC in a short time.
World oil production was increased not just for escalating its 27 per cent proven reserves over the last decade. It was rather driven by the egotistical behaviour of giant producers due to their energy politics and intra-regional political economy. The USA recorded world's largest growth in oil production for the fourth consecutive year and explored more than one-third of non-OPEC total in 2014. On the other hand, the OPEC (Organisation of Petroleum Exporting Countries), which holds 71.9 per cent of world's reserves, explored 42.1 per cent of world's total. Saudi Arabia, with one-third share in OPEC production, firmly decided not cut it even at loss. The Saudi-USA allies accepted economic pain to create the cheap oil bomb for Russia and Iran. However, Russia decided to continue its production as large as 10 per cent of world total even paying a yearly loss at the rate of $2.0 billion for $1.0 fall per barrel. If the non-OPEC countries add 0.8 million barrels in daily production against a global incremental demand of 1.17 million barrels in 2015, what will pull oil price up in the global market?
Overpricing oil in the domestic market despite cheap price in the global market, is one type of market intervention. If the price gap between domestic and overseas markets remains higher than the cost of smuggling, it may even stimulate illegal oil import in the country. This smuggling will be interlinked to other illegal trade that accounted for one-fourth of total border-trade for Bangladesh. Accordingly, a channel for smuggling-in would be developed if the high oil price persists in domestic market in the long run. In this regard, a low oil price with a small margin for BPC will not only offer incentive to domestic consumers but will also discourage illegal oil import.
Our daily oil consumption increased from 88 to 118 thousand barrels during 2010-2012 but declined by 1.7 per cent in 2013 as per the BP Statistical Review 2014. This fall in consumption was not obviously for use of alternative energy but for hike in oil price in January 2013. Our government might be happy for a relief of large subsidy burden but should not be pleased with low domestic consumption. Moreover, the supply of domestic natural gas is too inadequate to support growth of new industries and power plants. In this regard, the government policy needs emphasize on raising demand for oil and on controlling cost-push inflation from high oil price. Won't a cut in oil price compensate economic losses incurred during last elongated political unrests? Cannot it reduce at least the increased transport fare since the last blockade? Moreover, a low oil price will minimise probable inflation from new salary scale effective in the budget for 2016-17. Will the finance minister announce an adjustment of oil price in his budget speech?
Dr. M. Aminul Islam Akanda is Associate Professor, Department of Economics, Comilla University.
© 2024 - All Rights with The Financial Express
