Sri Lanka fuel prices high amid politicized prices
Sept 14, 2008 (LBO) - Sri Lankan fuel users are suffering from the lack of a transparent price formula and severe politicization of pricing that had sometimes caused high inflation and balance of payments troubles in the island.
World oil prices have been tumbling after a commodity bubble burst following the collapse of an underlying credit bubble the previous year, but Sri Lankan customers are yet to feel the benefit, unlike citizens of country's where fuel in market-priced.
Fleecing
In Sri Lanka petrol is sold at an exorbitant price of 157 rupees a litre though the international price of refined petrol has now come down to 70.70 rupees, with an exchange rate at 108 rupees a dollar, according to prices released by the Central Bank.
The Central Bank said refined petrol was quoted at 104.10 rupees a barrel in Singapore Friday.
Refined diesel was only 79.30 rupees a litre (116.75 US dollar a barrel) and kerosene 80.7 rupees (118.90 US dollar a barrel). Diesel is sold at 110 rupees a litre in Sri Lanka.
There have been growing unhappiness at the way the government is fleecing petrol users who are mostly motorcycle and small car users by taxing them heavily and also using petrol profits to subsidize diesel users.
Diesel users are mostly commercial enterprises and super rich sections of society including politicians who are allowed to buy tax-fee diesel guzzling SUVs. Chairman of state-run Ceylon Petroleum Corporation (CPC) Ashantha de Mel said he was unable to cut prices immediately because of large losses incurred in the third quarter of 2008.
In the first six months of the 2008 CPC had managed to make a profit of 1.7 billion rupees, he said, with the bottom line boosted with hedging gains.
The government has also placed a discriminatory tax on petrol which hurts Lanka IOC more, a unit of Indian Oil that has a third share of the market. But despite the tax, Lanka IOC is reporting profits.
De Mel dismisses charges from Sri Lanka's main opposition United National Party - which successfully operated price formula in a previous administration - that CPC had stocked up on fuel at high prices and is unable to bring down prices for that reason.
He says CPC is only carrying one month of stock.
"We are supposed to carry two months of stocks, but we are only carrying one month," he says.
De Mel said he is currently sitting on a stock of diesel bought at 134 dollars a barrel (about 91 rupees a litre).
CPC also buys products on a monthly average, and daily spot prices do not match its purchase prices immediately.
Price Formula
In Sri Lanka fuel pricing is politicized and the country does not have a transparent published pricing formula which allows people to see how much tax the government is charging or how much profits the utilities are making.
In 2004, a price formula which had allowed inflation to be kept low and petroleum firms profitable, was abandoned under pressure from Janatha Vimukthi Peramuna (JVP), a Marxist-nationalist party.
Inflation which was near zero in 2004 promptly rocketed as money was printed to finance subsidies and the rupee came under pressure.
Ironically, earlier this month, the JVP which politicized fuel pricing and blocked their market pricing, is now calling for prices to be reduced.
In countries where fuel is market priced, and budgets are well managed, inflation is in low single digits.
But in countries where fuel is subsidized amidst already high budget deficits, forcing the central bank to 'monetize' or print money to finance subsidies, inflation is very high.
In Iran, a country where fuel is heavily subsidized, inflation hit 27.0 percent in the Islamic month of Mordad ending August 21, media reports said.
Venezuela, another oil subsidizing producer, has seen inflation of around 30 percent this year.
No Prizes
Developing-country politicians and policy makers, who have a weak understanding of economics, believe that inflation is a petroleum phenomenon rather than a monetary one, emerging from the central bank.
In Sri Lanka the myth has been further refined to say that inflation is specifically caused by diesel, rather than petrol. No one has won a Nobel Prize for the 'discovery', so far.
Even some central bankers have claimed at times that oil imports (and not other imports) caused foreign exchange shortages, though currency crises are a problem associated with a soft-pegged exchange rate which has little to do with imports in general let alone oil specifically.
But, as a result - diesel which is more expensive and is priced higher than petrol in low inflation countries - is priced lower than petrol in high inflation Sri Lanka.
Earlier this month central bank deputy governor W A Wijewardena warned against 'monetizing' external shocks - like oil prices - saying market pricing was needed to keep inflation low.
Sri Lanka's cooking gas prices however has been put under formula under a court order. No one has so far taken CPC to court for fleecing petrol users.
In July 2007 de Mel tried to bring back the formula but was shot down by politicians after just two months in operation, when oil prices rose again. Inflation rocketed and the country was caught in a balance of payments crisis.
Uncertainty
De Mel is now naturally wary about cutting prices, having been prevented by politicians from raising prices when prices go up.
"Prices may go up, if Hurricane Ike damages US refineries," he says. "The northern hemisphere winter is also coming up."
De Mel wants to recover third quarter losses in the fourth quarter of the year.
He says the oil industry analysts are predicting that crude may go back up to 130 US dollars within weeks if not months; though a commodity bubble seems to have finally burst.
"OPEC (organization of petroleum exporting country) is now cutting production," he observes.
"Oil prices are a demand and supply problem."
Oil analysts differ sharply from monetary economists, and the International Monetary Fund (IMF) who identified the recent rise in food, base metals, precious metals and energy commodities as a 'broad based boom' or 'bubble' caused by a monetary shock.
When US monetary policy was tight, after chairman Paul Volcker brought in monetary targeting in the early 1980s after the second oil shock. the OPEC was a mere by-stander as prices plummeted as low as 10 dollars a barrel.
Even now OPEC only has a 40 percent market share, and many producers, except Saudi Arabia have traditionally exceeded their quotas on the sly.
IMF researchers in particular had been predicting the bursting of the commodities bubble this year after the under-lying 'sub-prime' credit bubble burst August last year.
They pointed out that the 2007 bubble, like the 1973 and 1980 bubbles and 'oil shocks' were caused by reserve currency central bank money printing, particularly by the Federal Reserve which depreciated paper money against real commodities.
Monetary Shock
Commodity bubbles have been a problem since 1973 when a the US dollar went off the gold standard amidst heavy money printing firing a commodity bubble and an 'oil shock' and the world entered pure-fiat-paper-money-central banking.
But with the collapse of the sub-prime bubble, the US printed money to cut rates in a bid save its collapsing banking system and re-flate house prices.
But with a weakened banking system, monetary policy is having limited effect in stimulating credit, a condition known as 'central bank impotence', though rate cuts sent gold and other commodities to record highs in the first half of 2008.
The dollar is now appreciating rapidly with credit demand collapsing and the Fed halting rate cuts amidst severe criticism of its money printing tendencies.
"I am deeply concerned about what the Fed has done in the last year and in the last decade," Senator Jim Bunning of Kentucky told Fed chairman Ben Bernanke during a congressional hearing in July 2008.
"Chairman Greenspan's easy money the late nineties and then following the tech bust inflated the housing bubble and created the mess we are in today.
"Chairman Bernanke’s easy money in the last year has undermined the dollar and sent oil to new record highs every few days, and almost doubling since the rate cuts started. Inflation is here and it is hurting average Americans."
Most precious metals, has been falling since March, rice since April and wheat since February 2008.
Ironically, gold peaked at over 1000 US dollar in March, exactly 35 years after the Bretton Woods agreement collapsed when the Federal Reserve failed to keep the gold standard at 35 dollar an ounce, because of excessive printing.
Gold fell 50 dollars to below 750 dollars an ounce last week, around to the levels seen in September 2007 when US started rate cuts, when oil was around 80 dollars a barrel.
Sept 14, 2008 (LBO) - Sri Lankan fuel users are suffering from the lack of a transparent price formula and severe politicization of pricing that had sometimes caused high inflation and balance of payments troubles in the island.
World oil prices have been tumbling after a commodity bubble burst following the collapse of an underlying credit bubble the previous year, but Sri Lankan customers are yet to feel the benefit, unlike citizens of country's where fuel in market-priced.
Fleecing
In Sri Lanka petrol is sold at an exorbitant price of 157 rupees a litre though the international price of refined petrol has now come down to 70.70 rupees, with an exchange rate at 108 rupees a dollar, according to prices released by the Central Bank.
The Central Bank said refined petrol was quoted at 104.10 rupees a barrel in Singapore Friday.
Refined diesel was only 79.30 rupees a litre (116.75 US dollar a barrel) and kerosene 80.7 rupees (118.90 US dollar a barrel). Diesel is sold at 110 rupees a litre in Sri Lanka.
There have been growing unhappiness at the way the government is fleecing petrol users who are mostly motorcycle and small car users by taxing them heavily and also using petrol profits to subsidize diesel users.
Diesel users are mostly commercial enterprises and super rich sections of society including politicians who are allowed to buy tax-fee diesel guzzling SUVs. Chairman of state-run Ceylon Petroleum Corporation (CPC) Ashantha de Mel said he was unable to cut prices immediately because of large losses incurred in the third quarter of 2008.
In the first six months of the 2008 CPC had managed to make a profit of 1.7 billion rupees, he said, with the bottom line boosted with hedging gains.
The government has also placed a discriminatory tax on petrol which hurts Lanka IOC more, a unit of Indian Oil that has a third share of the market. But despite the tax, Lanka IOC is reporting profits.
De Mel dismisses charges from Sri Lanka's main opposition United National Party - which successfully operated price formula in a previous administration - that CPC had stocked up on fuel at high prices and is unable to bring down prices for that reason.
He says CPC is only carrying one month of stock.
"We are supposed to carry two months of stocks, but we are only carrying one month," he says.
De Mel said he is currently sitting on a stock of diesel bought at 134 dollars a barrel (about 91 rupees a litre).
CPC also buys products on a monthly average, and daily spot prices do not match its purchase prices immediately.
Price Formula
In Sri Lanka fuel pricing is politicized and the country does not have a transparent published pricing formula which allows people to see how much tax the government is charging or how much profits the utilities are making.
In 2004, a price formula which had allowed inflation to be kept low and petroleum firms profitable, was abandoned under pressure from Janatha Vimukthi Peramuna (JVP), a Marxist-nationalist party.
Inflation which was near zero in 2004 promptly rocketed as money was printed to finance subsidies and the rupee came under pressure.
Ironically, earlier this month, the JVP which politicized fuel pricing and blocked their market pricing, is now calling for prices to be reduced.
In countries where fuel is market priced, and budgets are well managed, inflation is in low single digits.
But in countries where fuel is subsidized amidst already high budget deficits, forcing the central bank to 'monetize' or print money to finance subsidies, inflation is very high.
In Iran, a country where fuel is heavily subsidized, inflation hit 27.0 percent in the Islamic month of Mordad ending August 21, media reports said.
Venezuela, another oil subsidizing producer, has seen inflation of around 30 percent this year.
No Prizes
Developing-country politicians and policy makers, who have a weak understanding of economics, believe that inflation is a petroleum phenomenon rather than a monetary one, emerging from the central bank.
In Sri Lanka the myth has been further refined to say that inflation is specifically caused by diesel, rather than petrol. No one has won a Nobel Prize for the 'discovery', so far.
Even some central bankers have claimed at times that oil imports (and not other imports) caused foreign exchange shortages, though currency crises are a problem associated with a soft-pegged exchange rate which has little to do with imports in general let alone oil specifically.
But, as a result - diesel which is more expensive and is priced higher than petrol in low inflation countries - is priced lower than petrol in high inflation Sri Lanka.
Earlier this month central bank deputy governor W A Wijewardena warned against 'monetizing' external shocks - like oil prices - saying market pricing was needed to keep inflation low.
Sri Lanka's cooking gas prices however has been put under formula under a court order. No one has so far taken CPC to court for fleecing petrol users.
In July 2007 de Mel tried to bring back the formula but was shot down by politicians after just two months in operation, when oil prices rose again. Inflation rocketed and the country was caught in a balance of payments crisis.
Uncertainty
De Mel is now naturally wary about cutting prices, having been prevented by politicians from raising prices when prices go up.
"Prices may go up, if Hurricane Ike damages US refineries," he says. "The northern hemisphere winter is also coming up."
De Mel wants to recover third quarter losses in the fourth quarter of the year.
He says the oil industry analysts are predicting that crude may go back up to 130 US dollars within weeks if not months; though a commodity bubble seems to have finally burst.
"OPEC (organization of petroleum exporting country) is now cutting production," he observes.
"Oil prices are a demand and supply problem."
Oil analysts differ sharply from monetary economists, and the International Monetary Fund (IMF) who identified the recent rise in food, base metals, precious metals and energy commodities as a 'broad based boom' or 'bubble' caused by a monetary shock.
When US monetary policy was tight, after chairman Paul Volcker brought in monetary targeting in the early 1980s after the second oil shock. the OPEC was a mere by-stander as prices plummeted as low as 10 dollars a barrel.
Even now OPEC only has a 40 percent market share, and many producers, except Saudi Arabia have traditionally exceeded their quotas on the sly.
IMF researchers in particular had been predicting the bursting of the commodities bubble this year after the under-lying 'sub-prime' credit bubble burst August last year.
They pointed out that the 2007 bubble, like the 1973 and 1980 bubbles and 'oil shocks' were caused by reserve currency central bank money printing, particularly by the Federal Reserve which depreciated paper money against real commodities.
Monetary Shock
Commodity bubbles have been a problem since 1973 when a the US dollar went off the gold standard amidst heavy money printing firing a commodity bubble and an 'oil shock' and the world entered pure-fiat-paper-money-central banking.
But with the collapse of the sub-prime bubble, the US printed money to cut rates in a bid save its collapsing banking system and re-flate house prices.
But with a weakened banking system, monetary policy is having limited effect in stimulating credit, a condition known as 'central bank impotence', though rate cuts sent gold and other commodities to record highs in the first half of 2008.
The dollar is now appreciating rapidly with credit demand collapsing and the Fed halting rate cuts amidst severe criticism of its money printing tendencies.
"I am deeply concerned about what the Fed has done in the last year and in the last decade," Senator Jim Bunning of Kentucky told Fed chairman Ben Bernanke during a congressional hearing in July 2008.
"Chairman Greenspan's easy money the late nineties and then following the tech bust inflated the housing bubble and created the mess we are in today.
"Chairman Bernanke’s easy money in the last year has undermined the dollar and sent oil to new record highs every few days, and almost doubling since the rate cuts started. Inflation is here and it is hurting average Americans."
Most precious metals, has been falling since March, rice since April and wheat since February 2008.
Ironically, gold peaked at over 1000 US dollar in March, exactly 35 years after the Bretton Woods agreement collapsed when the Federal Reserve failed to keep the gold standard at 35 dollar an ounce, because of excessive printing.
Gold fell 50 dollars to below 750 dollars an ounce last week, around to the levels seen in September 2007 when US started rate cuts, when oil was around 80 dollars a barrel.
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