The negative burden of high fuel cost

E. Ablorh-Odjidja, Ghanadot

January 11, 2011

The government's fuel price increases began on January 4, 2011; the reason being that it has been “forced to increase the prices due to the rise in the price of crude oil on the international market.” 

The change adds 30% more to the cost that Ghanaians are already paying for petrol and diesel at the pump, thus continuing the trending practice of the year-to-year increases in fuel prices.

With the years, Ghanaians have their policy planners to thank for the unreasonable rises in fuel cost.

At issue today must be why the high cost, even with the government’s claim that it provides subsidy on fuel. 

Another must be why the government, with the tremendous resource at its disposal, has not been able to develop yet the efficacy for hedging crude prices to protect Ghanaians from price fluctuations on the world market.

But before wondering further, there is another twist, this time told by the National Petroleum Authority of Ghana (NPA).  According to them the hedging is done, but:

“The hedging is only for 50 percent of our domestic consumption so if prices go up, there will still be a review upwards because we only hedge 50 percent,” said the Chief Executive of the NPA, Mr. Alex Mould, to Citi Business news.

I will love for someone to explain further the rationale behind the need for only the 50% hedging.

Hedging or not, what I know so far is that even when prices at the world market decrease, our local pump prices continue to go up when compared to the immediate, previous years.

This is a condition that begs one to ask the NPA if Ghana buys her crude from the same source as other countries.

Presumably and from the price at the local pumps, Ghana must have bought her crude at a higher rate than the United States.

In the United States, a gallon of regular fuel is now selling at an average of $3.00 per gallon, without subsidy from the government, whereas in Ghana the same is at about $5.00, with subsidy.

Fuel prices in the United States are for many parts heavily taxed at State and Federal levels and still appear comparatively lower at the pump than in Ghana.

While there are many factors to pricing fuel at the pump, the factors in Ghana are hard to identify, explain or understand.

In Canada for instance, components for fuel cost follow in this general direction: 

Crude price is at 47% of the final product at the pump, 19% for marketing and refining, and 34% for taxes (info provided by Canadian Petroleum Institute). 

The institute says “Excluding taxes, the price of gasoline in Canada is practically the same as in the United States.”   

Can the NPA tell us what percentage of the fuel cost in Ghana is pure tax, or there is none?

As for hedging, Mr. Mould says:

“Hedging remains relevant because it is the government that will decide to absorb (the price increase) or not, and when the government absorbs, the question is, how does the government get paid for that, does it have any relief from somewhere?

“The relief comes from hedging. If you do not hedge you have the whole brunt of the price increase. If you hedge you have part relief coming from the benefits of the hedge…”

Nicely told, but hedging is a risk management tool.  Its only objective can only be derived as leading to low cost at the pump.  The high cost at the pumps in Ghana, therefore, is the evidence for the failure of the hedging effort.

The idea of edging is not at fault, since it is only a tool for risk management.  The question is whether our practitioners have the maturity, experience, and sophistication to manage the process well, or have they been bumbling all along?

The public must know, that as much as the NPA has remained ambiguous about gains or losses from their hedging practices, the increases at the fuel pump at the pump have always been indicative of their lack of success with the hedging practice.   

The failure in hedging has left our successive governments dependent on the pumps as collection sources for additional revenue.

In a practical sense, this approach is far-reaching and can be described as fungible because everybody pays.  But the problem, as we may later see, places a heavy penalty on the poor.

High taxes at the pump, like all things excessive, are counter-productive in several ways.

They burden economic growth; the more the exercise on fuel the higher the cost impact on the production of goods and services.  And the cost is amplified as it is passed onward into public transportation.

The cost spirals downward to impact the poor at the retail level. 

Everything that depends on transportation will find cost increases, from food at the table to boarding the bus for work.  The poor, again, may see their net income from legitimate work drastically reduced.

And the driver of this negative impetus is the government's confusing taxation on fuel at the pump.

And some social consequences may also result.