Petroleum products pricing in Ghana - Economics or Politics?

The subject of petroleum products pricing has always been a contentious one. Ghana like all developing countries is always faced with the problem of a pricing scheme that will be acceptable to the population but which will not also cripple the economy. This notion has therefore influenced all pricing regimes for petroleum. Particularly, there have been times one wonders whether politics or economics are the main pillars behind our pricing policies.

As a result of the problems in the petroleum sector, government embarked on a deregulation process in 1996. A process for publishing and applying an Automatic Adjustment Formula for pricing petroleum products to ensure full-cost recovery was also completed in 2001. The National Petroleum Tender Board (NPTB) was set up to regulate pricing based on the formula.

Since October 2005, the deregulation of the petroleum sector was pushed further leading to the establishment of the National Petroleum Authority (NPA) which replaced the Tender Board and which is responsible for monitoring and publishing 'import parity' cost of refined petroleum products in to Ghana based on a transparent pricing formula.

The main factors that affect petroleum pricing in Ghana are crude oil prices, the exchange rate, taxes and levies and margins. Now under the enhanced phase of deregulation, the OMCs are responsible for importing crude oil and refined petroleum products.

There is no doubt that there is significant public interest in petroleum product pricing exhibited through mass strikes and demonstrations. The latest legal suit against the NPA and TOR over the pricing formula has ignited the interest even more.

This paper does not cover analysis of 'ex-refinery differential' which is the bone of contention before the law court. Rather it looks at the major issues that affect petroleum pricing and the reality which Ghanaians must face.

THE PETROLEUM PRICING FORMULA
There are four different formulae used by the NPA to compute the prices of products.

i. Ex-pump Price = Ex-refinery Price + Taxes/Levies + Margins

ii. Ex-refinery Price = CIF + Related Charges
iii. CIF = Cost (FBO) + Insurance + Freight
iv. Related Charges = Off-loading Cost + In-transit Losses + Inspection + L/C Cost +

Financial Cost + Storage Cost + In-plant Losses + Rack Loading Cost + Operating Margin.

These mathematical formulae may not make any meaning to most people. What is important though is that most of these factors change according to both domestic and foreign economic circumstances. Some of the issues that lead to changes in the various components of the formulae are; crude oil prices, the exchange rate, weather conditions on the high seas, efficiency and financial strength of TOR, OMCs and Oil Trading Companies (OTCs), and government's fiscal regime (taxes and subsidies).

There are also issues of transparency, transport fares and general living conditions of Ghanaians which have shaped the economic and political debate on petroleum pricing. However, both politics and economics may be far off the reality. The consensus that should be mobilized now is how much politics and economics need to inform petroleum pricing.

TAXES AND LEVIES
Most governments around the world use petroleum taxes and levies to raise funds for development. The petroleum pricing formula in Ghana therefore has different taxes and levies. As at May, 2006, the following taxes and levies were imposed on petroleum prices in Ghana:

Therefore ex-refinery prices at that time was 57% of ex-pump price implying that taxes and levies constituted 43% of the price.

Most of these levies are comparable to what pertains in other countries. For example, the Road Fund Levy of 7% is not very different from the 7.5% in Togo and Tanzania, 8% in Benin, Kenya and Ivory Coast.

Politics and economics affect the type, number and rates of taxes imposed on products. We can imagine what the state of our roads would have been without the Road Fund or where the country would have gotten money to import crude oil without the excise duties.

For instance, Ghana's expenditure on crude oil imports rose from US$500 million in 2005 to US$2.1 billion by the end of 2007 for the same quantity of oil. How the country finances these imports is not oblivious of the implications for economic development.

It must be stated however that the over-reliance on petroleum taxes and levies leads to overpricing of petroleum products. Governments mindful of the repercussions - economic or political, have often resorted to tax review in times of difficulty.

As an illustration, following extreme volatility in crude oil prices and increased food crisis in 2008, the government of Ghana removed excise duties and debt recovery levies on premix fuel and reduced same on Kerosene and Marine Gas.

The government again reduced taxes in early 2009 to mitigate the hardships resulting from crude price increases. Whether these measures in both cases were realistic or not can be traced to the effects of such measures on government revenues and whether such measures are able to keep prices low for a long time. Continued    Source: myjoyonline - Myjoyonline.com