ACEP Warns Gov’t Over Petroleum Subsidy

Government, although has not been transparent with the exact amount of petroleum subsidies for some time now, and has been recently engaged in debate with Bulk Distribution Companies (BDC’s) over amount owed them, there is no doubt that the five days of the country’s petroleum crisis clearly exposes government vulnerability to fiscal challenges in managing the downstream petroleum sector.

The Central focus of the recent problems relates to the inability of BDC’s to supply petroleum products citing government failure to pay debts owe them, exchange rate losses, their inability to raise new Letters of Credit and the refusal of their suppliers to give them the products as well.

The Africa Centre Energy Policy (ACEP) strongly bemoaned that government should halt petroleum products subsidies because of the import parity prices of petroleum products which could incur hugedebts in the medium to long term as the global economy recovers and demand for oil increase.

The Centre however urged the central government to implement measures that will reduce the adverse effects of market prices on the poor.

Dr. Mohammed Amin Adam, Executive Director of ACEP said government’s indebtedness to BDC’s can be related to subsidies on price differential on petroleum products which government has absorbed but failed to budget and finance it.

The subsidy accounts for the estimated debt ofGH1.3 billion from July 2011 to December 2013, a conscious decision government failed to finance.

Moving forward, the Executive Director called on the government to embark on a full deregulation policy in which the market forces of demand and supply determines products prices based on international parity prices.

This, he proposed that National Petroleum Authority should focus on investigating and penalizing collusive pricing and ensuring the distribution of quality petroleum products.

According to Dr. Amin, ‘we must seek to increase domestic refinery capacity to reduce refinery margins through economies of scale, in this view we must support the joint venture arrangement proposed by government between TOR and the Saudis.’

He added Ghana will increase the domestic sourcing of petroleum products and significantly reduce the additional cost associated with importing petroleum products such as insurance and freight charges when the country begins to refine its crude oil at TOR.

In his second proposal, the Executive Director of ACEP called for a full deregulation but this time around with a price cap.

What he meant was that a pass through policy is applied to the extent that the ex-refinery price does not exceed a predetermined benchmark price, stating that beyond the benchmark government intervention in the market for petroleum products is justified.

Some measures, he stated should include tax relief on petroleum products although will reduce government’s revenues but only for a limited period.

Dr. Amin called for the establishment of a price stabilization scheme where a small levy (say 1 pesewas on every petroleum product) should be introduced and proceeds from the levy are investment under the scheme and managed by NPA.

He posited that this can be spent only when the ex-refinery price exceeds the pre-determined benchmark price.

According to him, the era of cheap oil is gone and crude oil prices will not fall to the levels in the 1980s, the managers and policy makers of the petroleum sector must take into consideration these policy measures.

He noted that the fundamentals of the global oil market is more alarming, particularly the behavior of crude oil prices and global refinery capacity continue to signal more difficult times for pricing petroleum products.

According to Dr. Amin, the world’s three largest regions for crude oil refining-Asia, North America, and Western Europe comprise more than 68% of the global refining capacity.

Therefore, if refinery capacity declines in these regions where most of Ghana’s produce are sourced from, the import parity prices of refined products will increase significantly hence, the need to scrap petroleum subsidies.

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