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Opinions of Monday, 5 January 2015

Columnist: Ata, Kofi

Is 50% Fuel Reduction Demand by Occupy Ghana Rational?

By Kofi Ata, Cambridge, UK January 4, 2015

Since the world market price of crude oil began its downward trend six months ago, there have been calls on government to reduce the retail prices of petroleum products in Ghana. The government or National Petroleum Agency (NPA), has been recalcitrant and not only maintained the high prices but also increased the tax on petroleum products by 15% in November/December 2014, against all odds. Under severe pressure, the NPA bowed to public demands and reduced prices by 10% from January 1, 2015. The NPA’s argument for maintaining the high prices despite 50% fall in crude oil price is that it owes the Bulk Oil Distribution Companies (BDCs) Ghc412 million, therefore, to clear the debt prices should not be reduced. The reason for the 10% reduction was that Ghc200 million of the debt has now been paid. Following the token reduction, Occupy Ghana called on NPA to reduce prices by 50% (see, “NPA should have reduced fuel prices by 50% - Occupy Ghana”, Ghanaweb, January 3, 2015). This article is an analysis of both sides of the argument on fuel prices in Ghana.

In real monetary terms, NPA did not reduce petroleum products on January 1, 2015 if the earlier 15% increment is taken into consideration. In fact, that actually means current prices are at least, 5% higher prior to the 15% increase. In other words, the NPA deceived and fooled the public to believe that prices have been reduced, even if it’s better than nothing.

There is no doubt that governments have taken Ghanaians for a ride when it comes the price of petroleum products. This is due to two main factors. The state has a monopoly in the market and demand for petroleum products is almost inelastic as the products are everyday necessity whether one owns a vehicle or not. Other reasons include the fact that the pricing of petroleum products is shrouded in secrecy with governments claiming they spend millions to subsidise petroleum products, a weak and unstable local currency, etc. As a result, often, the retail prices of petroleum products in Ghana bear no resemblance to the world market prices of crude oil.

For the above and others reasons, arguments for and against retail prices of petroleum products in Ghana by governments and consumers respectively are based on emotions rather than on facts. The effect is that governments get away with murder whilst consumers are left to lick their wounds with unrealistic expectations and demands on how much prices should be. A typical scenario is the call by Occupy Ghana for a 50% reduction simply because the world market price of crude oil has fallen by 50%. Is this call reasonable and realistic? No.

For example, in the UK where the market is liberlised, prices of unleaded petrol at the pump have seen an average of 15.8% price reduction since July 2014. In July unleaded petrol was 131.5 pence per litre but has come down to 110.7 pence per litre in January 2015, a reduction of 20.8 pence per litre. Taking an exchange rate of Ghc5.00 to £1.00 and 4.5 litres to a gallon, it means UK drivers pay £4.98 per gallon (the equivalent of Ghc24.90 per gallon in Ghana). We should bear in mind that wages in Ghana are low so Ghanaians are paying a fortune for petrol.

Why is Occupy Ghana’s 50% reduction demand on NPA unreasonable? Those making this demand are relying on false assumptions that the retail prices of petroleum products are solely determined by world prices of crude oil and therefore the 50% fall in crude oil price must result in equivalent retail price reduction. This is not only false but also dangerous. First, the retail prices are made up of different elements with higher percentage being tax that remains the same. Unless there are corresponding 50% reductions in all the pricing elements, any case for 50% reduction in retail prices of petroleum products in Ghana is misguided, intellectually bankrupt and just attention seeking political mischief (to borrow Kwaku Baako’s phrase).

Again, certain costs related to refining crude oil, the storage and distribution of finished products remain the same despite the 50% reduction in crude oil price. The transporting cost of crude oil to the refinery has also not been reduced, let alone by 50%. Moreover, some capital and revenue costs of refining crude oil, including staff cost remain the same or may even go up. Last but not the least, is the exchange rate. The cedi/dollar rate has fallen considerably, particularly in 2014 when the cedi depreciated sharply against the dollar, the currency which crude oil is priced and sold on the world market. For these and other reasons there can never be 50% retail prices reduction of petroleum products anywhere in the world simply because world market price of crude oil has reduced by 50% since July 2014. That is too simplistic an argument.

The chances of a 50% price reduction in Ghana is unthinkable, even if that has happed in some countries for the fact that, Ghana currently imports refined petroleum products instead of crude oil to refine. This means Ghana or NPA is not directly benefiting from the 50% crude oil price reduction on the world market. Consequently, Ghana is paying wholesale prices for refined petroleum products, which unlike crude oil have not seen a 50% price reduction and therefore NPA’s ability to reduce retail prices is limited by the percentage reduction available in the wholesale market. This also makes Occupy Ghana’s demand more irrational.

From the above, it’s clear that both the government and Occupy Ghana are dishonest over arguments on retail prices of petroleum products in Ghana. In fact, the situation has become more contentious as the prices of petroleum products in the Fourth Republic have become a political tool. NDC when in opposition accused the then NPP government of being insensitive to the plight of Ghanaians by keeping prices high when crude oil price fell on the world market. When President Kuffuor reduced prices just before the second round of the Presidential Elections in December 2008, the then NDC presidential candidate, the late President Atta Mills claimed the reduction was inadequate and he would further reduce them when given the mandate, yet, after he won the presidency, prices did not come down in real terms.

Notwithstanding the above, those calling for further price reduction are justified to make reference to what NDC said when in opposition. The then NPP government did not enjoy the benefit of a 50% reduction in the world market price of crude oil (though the cedi/dollar rate was higher). The NDC government should bear in mind that come December 2016, the stick they used to beat the then NPP government on fuel prices would be used against them if NPA refuses to listen the voices of reason and further reduce prices, by at least, 15% in real terms. In other words, a further 25 % reduction of current prices.

The case of allegedly clearing outstanding debt from subsidy just to maintain the current prices is no longer sustainable. NPA must come clean by making public how prices of petroleum products in Ghana are calculated and the exact element of subsidy. Until that is done no one will believe that the prices contain any element of subsidy. It is in the best interest of the government to reduce prices now since the world market price of crude oil is unpredictable and could go up by the time of the general elections. Any price reductions at that time would be seen as an attempt to bribe the electorate and be counterproductive. It is strongly suspected that the price of petroleum products was a factor in NPP losing the 2008 presidential elections. Could the same be Mahama’s waterloo in December 2016?

Kofi Ata, Cambridge, UK