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Sept 05, 2012 (LBO) - Indian Oil Corporation's Sri Lanka unit, Lanka IOC has called for a pricing formula for retail fuels which keeps parity with import prices a call that has been echoed by other economists and analysts.
"It would help everyone if the Government of Sri Lanka could evolve a long-term pricing formula which will provide for adjustment of duties and levies and revision in prices from time to time based on the international prices, with proviso to insulate consumers wherever required," Nene told shareholders in the annual report.
"The formula should be such that it provides reasonable margins to the oil companies to invest in energy-related infrastructure, including storage and efficient distribution of petroleum products."
Makrand Nene said several developing nations have tried to fix retail prices of fuel, as the volatility of global oil prices increased.
"While many of them are resorting to tax and duty structure reforms, and even subsidies, so as to keep the selling prices at affordable levels for the common man, this does not appear to be a viable, long-term solution in the best interest of all the stakeholders," he said.
"It is not only impacting the economies of several nations negatively but also affecting the financial stability of the oil companies, both Government-run and private, as they operate in an artificial pricing regime, disconnected from global realities."
In the last few years the Indian petroleum sector was also thrown into crisis due to state price controls, and the firms including refiners were later bailed out with treasury bonds. The issuing of Treasury bonds however increases the national debt burden on every citizen.
Analysts have pointed out that government trying to insulate consumers through energy price controls is simply a complex deception, practiced on an unsophisticated populace.
In 2011 Sri Lanka subsidized power and petroleum with bank credit, pushing the country into a balance of payments crisis which resulted in the rupee falling from 110 to 132 to the US dollar, raising inflation across the board.
In Sri Lanka balance of payments crisis in 1999/2000, 2008/2009 and 2011/2012 has been closely tied to energy price manipulations.
Analysts trace the price deception through several phases. When international energy prices rise, the state forces utilities to run losses claiming to 'protect' consumers. The utilities then take bank loans to bridge the losses.
The central bank then prints money to keep interest rates down in the face of higher credit demand. The state may also reduce taxes, depriving itself of revenue. The central bank will then print further money to bridge the revenue gap.
The increase in demand can create economy wide continuous monetary inflation.
The injection of rupee reserves in to the banking system, and the resulting credit and demand eventually push up import demand, putting pressure on the exchange rate.
Users of imported energy also continue to spend on non-oil imports, as their disposable income is not reduced, putting pressure on the balance of payments through a widening trade deficit.
As pressure on the exchange rate mounts, central banks of developing countries typically defend the exchange rate by selling dollars and simultaneously print more money to keep interest rates down, a process known as sterilized foreign exchange sales.
The vicious cycle of dollars sales and rupee injections can only be halted by a float of the currency and the resulting depreciation alters the entire price structure in the island, forcing up prices of all goods not just oil.
But an automatic fuel adjustment formula immediately cuts the disposal income of oil users reducing their ability to import non-oil goods, keeping the external sector balanced with domestic demand.
Sharp spikes in bank credit demand are also avoided requiring no money printing to keep interest rates down, helping keep the exchange rate fixed and inflation low.
After fixing oil prices through the second half of 2011, Sri Lanka raised energy prices, allowed interest rates to go up and floated the rupee. Inflation, which had been kept in low single digits since 2009, is now touching 10 percent.
Like in India, energy utilities are bailed out with Treasury bonds, increasing the debt burned on future generations.
India has taken steps to progressively 'de-control' prices.
In countries where there is high public awareness about energy price deceptions, as well as the general understanding that a state can only spend the money taxed from citizens, or by creating inflation and currency depreciation through printing cash, energy prices are changed daily.
http://www.lbo.lk/fullstory.php?nid=1192574664
"It would help everyone if the Government of Sri Lanka could evolve a long-term pricing formula which will provide for adjustment of duties and levies and revision in prices from time to time based on the international prices, with proviso to insulate consumers wherever required," Nene told shareholders in the annual report.
"The formula should be such that it provides reasonable margins to the oil companies to invest in energy-related infrastructure, including storage and efficient distribution of petroleum products."
Makrand Nene said several developing nations have tried to fix retail prices of fuel, as the volatility of global oil prices increased.
"While many of them are resorting to tax and duty structure reforms, and even subsidies, so as to keep the selling prices at affordable levels for the common man, this does not appear to be a viable, long-term solution in the best interest of all the stakeholders," he said.
"It is not only impacting the economies of several nations negatively but also affecting the financial stability of the oil companies, both Government-run and private, as they operate in an artificial pricing regime, disconnected from global realities."
In the last few years the Indian petroleum sector was also thrown into crisis due to state price controls, and the firms including refiners were later bailed out with treasury bonds. The issuing of Treasury bonds however increases the national debt burden on every citizen.
Analysts have pointed out that government trying to insulate consumers through energy price controls is simply a complex deception, practiced on an unsophisticated populace.
In 2011 Sri Lanka subsidized power and petroleum with bank credit, pushing the country into a balance of payments crisis which resulted in the rupee falling from 110 to 132 to the US dollar, raising inflation across the board.
In Sri Lanka balance of payments crisis in 1999/2000, 2008/2009 and 2011/2012 has been closely tied to energy price manipulations.
Analysts trace the price deception through several phases. When international energy prices rise, the state forces utilities to run losses claiming to 'protect' consumers. The utilities then take bank loans to bridge the losses.
The central bank then prints money to keep interest rates down in the face of higher credit demand. The state may also reduce taxes, depriving itself of revenue. The central bank will then print further money to bridge the revenue gap.
The increase in demand can create economy wide continuous monetary inflation.
The injection of rupee reserves in to the banking system, and the resulting credit and demand eventually push up import demand, putting pressure on the exchange rate.
Users of imported energy also continue to spend on non-oil imports, as their disposable income is not reduced, putting pressure on the balance of payments through a widening trade deficit.
As pressure on the exchange rate mounts, central banks of developing countries typically defend the exchange rate by selling dollars and simultaneously print more money to keep interest rates down, a process known as sterilized foreign exchange sales.
The vicious cycle of dollars sales and rupee injections can only be halted by a float of the currency and the resulting depreciation alters the entire price structure in the island, forcing up prices of all goods not just oil.
But an automatic fuel adjustment formula immediately cuts the disposal income of oil users reducing their ability to import non-oil goods, keeping the external sector balanced with domestic demand.
Sharp spikes in bank credit demand are also avoided requiring no money printing to keep interest rates down, helping keep the exchange rate fixed and inflation low.
After fixing oil prices through the second half of 2011, Sri Lanka raised energy prices, allowed interest rates to go up and floated the rupee. Inflation, which had been kept in low single digits since 2009, is now touching 10 percent.
Like in India, energy utilities are bailed out with Treasury bonds, increasing the debt burned on future generations.
India has taken steps to progressively 'de-control' prices.
In countries where there is high public awareness about energy price deceptions, as well as the general understanding that a state can only spend the money taxed from citizens, or by creating inflation and currency depreciation through printing cash, energy prices are changed daily.
http://www.lbo.lk/fullstory.php?nid=1192574664
