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Fuel price stabilisation fund in the making: Which country should we look at?

12 Dec 2020

By Madhusha Thavapalakumar One hundred and eleven and counting. That is how many times Sri Lanka revised its local fuel prices since March 1990. Under the fuel price formula alone, which was abandoned by the present Government, local fuel prices were revised about 19 times. The price of fuel is a sensational topic in Sri Lanka which is almost always included in all presidential election manifestos. It could be explained by the fact that local fuel prices affect the public both directly and indirectly while it could also impact the country’s economy significantly. The last time Sri Lanka’s fuel prices were revised was in September 2019, about 15 months ago. In the first half of this year, the pandemic drove global oil prices to negative levels, yet the Sri Lankan Government maintained local fuel prices at September 2019 levels. First, the Government said it will pass on the benefits of reduced global oil prices in the form of cheaper groceries during the local outbreak of the pandemic. A few weeks later, however, these groceries returned back to its pre-pandemic price levels; the public did not experience the benefit of reduced fuel prices nor reduced grocery prices. Meanwhile, fuel prices were still at its lowest levels in the global market. The Government went ahead and taxed the excess profits both the Lanka Indian Oil Corporation (LIOC) and Ceylon Petroleum Corporation (CPC) were making by selling fuel at September 2019 prices and created a petroleum stabilisation fund using the collected tax. The Government said that this fund would be utilised to settle the Ceylon Electricity Board’s (CEB) outstanding payments to the CPC. The plan was to collect Rs. 200 billion under this fund within six months. About three months later, Minister of Trade and Co-Cabinet Spokesman Dr. Bandula Gunawardana stated that the fund has not grown as expected due to a drop in consumption. About eight months later, today it is still unknown whether the fund accumulated the desired amount. In late November 2020, Minister of Energy Udaya Gammanpila stated that maintaining local fuel prices amidst fluctuating global oil prices is the policy of the present Government. He added that the Ministry is looking at the establishment of a stabilisation fund by studying contemporary market trends. The Sunday Morning Business this week decided to take a look at the importance of fuel price stabilisation while also delving into petroleum price stabilisation funds of other countries.  

Sri Lanka’s fuel price stabilisation fund

Fuel price fluctuation affects both the macro and microeconomy in many ways. According to Gammanpila, constantly fluctuating oil prices are largely felt by those who rely heavily on public transport. However, whilst meter taxis and privately owned transport services are quick to fight a fare increase whenever there is a fuel price hike, they are somewhat reluctant to reduce the prices when there is a drop in global fuel prices. Speaking to The Sunday Morning Business, Gammanpila stated that the Ministry is working on establishing a fuel price stabilisation fund. “Let’s assume the reference price of a litre of petrol is Rs. 100. If it comes down to Rs. 80, we will equally divide the balance between the fund and the consumer. Later, we will divide one third of the balance to the fund and the rest to the consumer. When there is a price increase, we will see whether we can manage the hike utilising the fund, without increasing the local oil prices. If we have enough funds, we will pay from the fund,” Gammanpila explained.    

How do fuel price fluctuations affect the economy?

Petroleum product prices are highly sensitive to external economic, political, and social fluctuations in the world. As a country that imports about 80% of its oil requirement, Sri Lanka's local oil prices are relatively sensitive to these fluctuations. To put it in simple terms, higher oil prices mean the public has to pay more to pump fuel and this leaves less money to spend on other commodities. As with households, the same applies to businesses that transport goods from one place to another or that use fuel as a main input in their business – take the aviation industry for example. Increased fuel prices are not going to result in just paying more to pump at gas stations; it will have an impact on the broader economy as well. Oil price hikes are generally associated with increased inflation and reduced economic growth. With regard to inflation, oil prices directly affect the prices of commodities for which petroleum has been utilised in the manufacturing process. Thereby, an increase in oil prices affects the cost of transportation and the cost of manufacturing too. Meanwhile, when fuel prices are reduced, it is cheaper for consumers to fill up their tanks, public transport fares will be reduced, and consumers will have more money to spend on other commodities. However, lower oil prices are not favourable for the domestic oil and gas sectors as it discourages investment and employment in the domestic sector.  

A few countries that have a petroleum price stabilisation fund

As the Sri Lankan Government is looking at contemporary market trends to establishing its fuel price stabilisation fund, we have taken a brief look at a number of such funds around the world, focusing particularly in the Asian region and at the efficiency and practicality of these funds since its establishment.  

Vietnam’s petroleum price stabilisation fund: An in-depth look

Escalating oil prices in the global market were creating instability in Vietnam’s domestic oil market. In order to bring in stabilisation, the Vietnamese Government established a petroleum price stabilisation fund in 2009 after months of contemplation. The fund was a financial instrument that avoided local oil price fluctuations, and thereby controlled inflation and stabilised the macroeconomy. According to Vietnam News in 2009, the petroleum companies were permitted to increase their retail price by only up to VND (Vietnamese dong) 500 per litre at a time, even if global prices rose above domestic retail prices. In turn, they received offsets from the stabilisation fund for any losses. Enterprises would still be required to follow the regulation even if the fund runs out of money. The fund was said to be established with contributions of VND 500 for every litre of gasoline, kerosene, diesel, and related products sold by enterprises. According to the circular, the retail price of petrol will be calculated based on the fuel import price in the Singaporean market, along with other input costs including freight charges, insurance fees, and the stabilisation fund contribution. Furthermore, the Vietnam News noted that the oil companies would also be required to cut their retail prices when they make a profit of more than VND 500 per litre. A World Bank (WB) document released the same year Vietnam introduced the fund, stated that every litre of fuel sold contributes to the fund, with the contribution varying from time to time. The money from or to oil companies goes through the fund and nothing goes to the Government. Suppliers are instructed to either apply an extra levy (and retain it in their accounts) or use part of the imputed value of suppliers’ funds. According to a review report on the petroleum price stabilisation fund compiled by Vietnam’s National Institute for Finance, which was submitted to the United Nations Development Programme (UNDP), the fund valorised petroleum prices in some sensitive periods at a moderate level. A few years later, Vietnam’s Ministry of Finance decided to publish the data on the fund every quarter. The Stabilisation Fund was $ 33 million in deficit in early 2011. In April 2012, the Ministry of Trade and Industry said outflows from the fund exceeded inflows by more than $ 110 million, but it was yet leaving companies with losses of $ 239 million. Since mid-2012, price adjustments were more market based, with wholesalers allowed to adjust prices, although it was still subject to final government approval. In the meantime, the Vietnamese Government was considering other options to stabilise prices, such as reducing import tariffs and drawing down on the Stabilisation Fund. Import tariffs on gasoline and jet fuel were abolished in February 2012, and on diesel and kerosene in March 2012. The Government historically adjusted import tariffs frequently to smooth retail fuel prices. The Vietnamese Government abolished subsidies on importers, but retail price increases were not allowed without approval from the Trade and Finance Ministries. With increases in retail prices failing to stay in line with rising international prices, importers suffered from negative margins. In January and February 2013, the Government did not allow prices to rise and instead asked fuel suppliers to draw from the Stabilisation Fund to reduce losses. The balance of the fund was firstly disclosed in July 2013. According to the review report, the fund reached $ 84.6 million by 2010 and it fell down to $ 70.5 million the following year. It fell down further to $ 34.8 million in 2012. The report on the Stabilisation Fund was prepared by PetroVietnam Oil Corporation (PVOIL), and as of 26 November this year, it contained VND 537.01 billion, which is approximately $ 23.11 million. According to PVOIL’s 2019 annual report, the Government’s petroleum price management had not kept up with market movements and at some points even deviated from global prices, causing many disadvantages to major distributors. “In the first quarter of 2019, global oil prices unexpectedly reversed with a sharp increase of about 30%. However, in order to stabilise the market during the Lunar New Year, the Government did not increase retail prices in most of the first quarter…As a result, the Stabilisation Fund of PVOIL and most of the focal major distributors were negative, affecting their cash flows and financial costs. Many focal major distributors reduced purchasing (and) restricted sales, resulting in a market discount that dropped to a very low level, making even retail channels generate losses,” the report added. It added that in order to keep prices stable during periods of increasing global prices, the Government demanded that the price stabilisation fund be used maximally which in turn made the fund constantly negative and increased the expenses of enterprises. When the prices dropped, firms had to bear inventory losses. It is learnt that despite the establishment of a petroleum price stabilisation fund, PVOIL, a subsidiary of Vietnam Oil and Gas Group has been suffering heavy losses due to the mismanagement of the fund. Vietnam Oil and Gas Group is a state-owned institution, like Ceylon Petroleum Corporation (CPC) in Sri Lanka.  

Thailand’s oil fund

According to an article written by Thiraphong Vikitset of National Institute of Development Administration, Bangkok, that appeared in the Southeast Asian Journal of Economics’ June 2014 issue, Thailand initially established an oil fund in 1973 when the energy crisis caused unprecedented increases in international oil prices. Thailand was one of the oil-importing countries that was severely affected by the energy crisis. In 1978, another version of the oil fund was set up with the objective of collecting windfall profits of the oil traders from the appreciation of the Thai baht. Later, the Thai Government integrated the 1973 Oil Stabilisation Fund with the 1978 Oil Fund Stabilisation (Foreign Exchange) in 1979 when there were sharp increases in international oil prices. The objectives of the 1979 Oil Stabilisation Fund were to prevent oil shortage and to maintain the oil price level to lessen the effects of the oil price increases in the domestic economy. According to an Asian Development Bank (ADB) report on Thailand, the country subsidises consumption of petroleum and natural gas products through the Oil Stabilization Fund, tax exemptions, and caps on ex-refinery and retail prices. It caps retail prices for diesel, liquefied petroleum gas (LPG), and natural gas for vehicles (NGV), and subsidises biofuel blends. For diesel and NGV, price subsidies are universal in that wealthy and poor consumers alike can access them. LPG prices vary depending on the consuming sector, and electricity prices are subsidised for low-consuming households. The oil fund is a monetary reserve that acts as a means of reducing price volatility and for cross subsidisation. Levies are imposed on fuels. Subsidies may be provided on a per-litre basis or as a lumpsum to fuel producers or distributors. Over the years, the oil fund has been used to reduce price spikes; cross-subsidise fuels for economic, political, or social reasons; and encourage greater use of domestically produced energy resources. Oil fund levies and subsidies are adjusted weekly. In theory, the oil fund is revenue neutral. In practice, it has required injections of government funds during periods of prolonged deficits and borrowings from commercial banks to allow ongoing deficits. Lumpsum transfers are made from the oil fund to LPG producers and importers to compensate for the capped ex-refinery price. Domestic producers of LPG are only compensated for the difference between the cost of production and the ex-refinery price. They are not compensated for the opportunity cost of selling LPG domestically rather than at the higher international price. In 2006, according to ADB data, THB (Thai baht) 1.5 were contributed to the fund from each litre of fuel sold and by the end of the year, THB 26.8 billion was collected under the oil fund. In the following years, contributions to the fund from each litre of petrol stood at THB 1.4, THB 0.4, THB 0.8, THB 0.7, negative THB 0.6, and THB 0.7, respectively, and by these years, contributed THB 26 billion, THB 7 billion, THB 14.5 billion, THB 12.1 billion, negative THB 11.6 billion, and THB 14.2 billion, respectively, to the fund by the end of each year. After 10 drones struck Saudi’s oil facilities in September last year, the Thai Government used THB 1.5 billion from their oil fund to support local oil prices. In October this year, the Thai Government was planning to impose more levies on motorists when global oil prices were low, to strengthen the fund. Thailand’s energy industry has both public and private sector entities. The Government owns 66.4% of the national oil and gas company, PTT Public Company (PTT), with a 51.1% outright stake and 15.3% through the Government-supported equity fund Vayupak. PTT produces the majority of domestically produced oil. PTT has a monopoly on natural gas distribution. PTT had sustained significant losses in its NGV operations by 2012, which had been only partially compensated by transfers from the oil fund. Nevertheless, PTT made a net profit of THB 122 billion for the year 2019, compared to THB 165.3 billion the previous year. In 2017, PTT’s net profit was THB 119.6 billion. Compared to PTT’s net profits before the year 2010, which were mostly below THB 100 billion, its current performance seems quite impressive. Nevertheless, it is unclear whether the sound financial performance of PTT can be attributed all alone to the oil fund, as the Thai Government initiated a couple of other projects and schemes for the domestic oil market along with the oil fund, including a card programme.  

Peru’s fuel price stabilisation fund

  The Government of Peru in May 2004 set up a fuel price stabilisation fund for an initial period of 120 days when benchmark gasoline and diesel prices soared by about 35% and 50%, respectively, from their December 2003 levels. The fund initially covered gasoline, kerosene, diesel, LPG, and industrial fuel. The range for wholesale prices of each product would have an upper limit and a lower limit, and if the import‐parity price was higher than the upper limit, the difference would be financed by the fund. Conversely, if the import‐parity price was lower than the lower limit, the difference would be credited to the fund, according to a World Bank policy research working paper. For LPG, export‐parity rather than import‐parity prices apply. A regulation issued on the fund limited the compensation and crediting to 10% of the values set by previous regulations for gasoline, diesel, kerosene, LPG, and industrial fuel used for certain purposes. Over the following two years, various petroleum products were dropped from the fund while diesel and fuel oil used to generate electricity in isolated systems were added, leaving only bottled LPG and diesel. In the face of volatile and rising world oil prices, the Government had to transfer a total of $ 2.4 billion to FEPC (El Fondo de Estabilización de los Precios de los Combustibles Derivados de Petróleo, translated The Fund for the Stabilization of Prices of Petroleum Derived Fuels) between 2005 and the end of 2011, after which budgetary transfers ceased. The fund’s debt in 2008 reached $ 1 billion, which was retired in 2009. After a large budgetary transfer to the fund, a new decree was issued and it required the regulatory agency to adjust price bands every two months and specified the band to be within ±5% of the import‐parity benchmark reference price, except LPG for which the variation would be 1.5%. Peru’s fund was reviewed in detail in 2014 as part of the Asia‐Pacific Economic Co-operation’s peer review of fossil fuel subsidies. The review concluded that the costs of the fund likely far outweighed the marginal benefits in reducing inflation. Given subsequent changes made to the fund, with 20 petroleum products dropped from it, the review concluded that retiring the fund completely was unlikely to have any significant effects on inflation.  

In terms of Sri Lanka

The CPC, the one and only state-owned oil corporation, was established in 1961 to end the domination of multinationals such as Caltex, Mobil, and Shell in the affairs of petroleum imports in Sri Lanka. Lanka IOC’s entry into the country in 2002 effectively ended over 40 years of monopoly by the CPC. Nevertheless, the majority of the market share still belongs to the CPC. The CPC has long been known as a loss-making state institution and it is not merely because of frequent, irrational price revisions based on political agendas but also due to the lack of infrastructure and facilities to transfer and store fuel. According to the Finance Ministry statistics, even before the introduction of the fuel price formula, the CPC lost Rs. 11.1 billion in the first four months of 2018, against an operating profit Rs. 3.55 billion in 2016. Nevertheless, the seven-week islandwide lockdown earlier this year necessitated by the local outbreak of Covid-19 transformed the CPC into a profit-making enterprise for the first time in years. It managed to record a net profit of Rs. 830 million in the first three quarters of this year, following a loss of Rs. 9 billion in the same period last year, as exclusively reported by The Sunday Morning Business last month. This was mainly due to less fuel pumping during the corresponding period this year coupled with a tax on fuel prices. Restricted travel during the lockdown period and less movement around the country, even after the removal of the lockdown, made the CPC cater to reduced demand at its current price point, the profit component of which is a question. While establishing a fuel price stabilisation fund might be a good move towards tackling never-ending global oil price fluctuations, and its impact on the economy and the state-owned oil company, if mismanaged, it could hurt the profitability of the CPC further and burden consumers. Now that Sri Lanka is looking at contemporary market trends, our country should pick the best practices of each such fund around the world. For example, Norway has an impressive State Petroleum Fund to which the operational manager is the Central Bank. The decision on how much oil revenue to save is made every year through the budget process. the Government issues specific guidelines for the management and choice of investment assets of the fund. Sri Lanka could adopt similar practices and make the process transparent with specific spending rules. Sri Lanka could also adopt an important feature of Vietnam's fund which is issuing quarterly reports of the fund’s balance and deductions. Since Sri Lanka has a track record of abandoning or mismanaging initiatives of this nature including the fuel price formula, continued implementation of the fund itself might be a success for the country. In the meantime, according to the extensive research that has been done in compiling this article, a country should not get too comfortable with its oil stabilisation fund and rely merely on imports for its fuel needs. It should also look for investment opportunities to develop the domestic oil sector – this could be applied to Sri Lanka, given that we are still importing more than three-quarters of our domestic oil requirement annually, which is weighing heavily on the country's import expenditure.  


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