Missed opportunities in fuel price drop

Consumers and businesses in Bangladesh have missed out on the benefits of cheaper oil prices throughout 2015 as the government did not adjust the prices downward, in line with the plunge in the global market, analysts said.

The decline in oil prices has been reflected to varying lengths in the domestic prices of oil products across the world. The price fall pass-along effect exceeded 50 percent on most oil products in Pakistan; the country adjusted its fuel prices on a monthly basis and also ensured lower tariff in electricity bills for its people.

India adjusted its fuel prices 22 times in recent months to constantly reflect the global market, so that the domestic producers and farmers get the maximum benefit of lower input costs. The Sri Lankan government also reduced oil prices and committed to providing a fuel price formula to its citizens so that pricing remained transparent.

These are not isolated incidents in just India, Pakistan and Sri Lanka; it is true for all the consumers in the world, except Bangladesh. The government appears to be least bothered about adjusting fuel prices in line with the international market price.  The Bangladesh government last revised the price of oil three years ago, when a barrel of crude oil cost nearly three times greater than the current price at around $40 a barrel. The average import price of crude oil was a little over $75 a barrel in fiscal 2014-15, down from nearly $110 a barrel in the previous year. The average price this year dropped to $52 a barrel, according to Bangladesh Petroleum Corporation (BPC).

“Consumers here are being deprived of the benefits of falling oil prices,” said Ahsan H Mansur, executive director of Policy Research Institute.

According to Mansur, inflation is going down across the world, but it is not fully reflected in the Bangladesh economy because of the non-adjustment of oil prices.

His point is evident in inflation data as well. Together with favourable commodity prices, cheaper oil has contributed to a rapid deceleration of inflation in several countries.

From December 2014 to November 2015, the 12-month average inflation rate in Bangladesh fell by 11 percent to 6.2 percent. Meanwhile, India's inflation fell by 28 percent to 4.8 percent, Pakistan's rate by 62 percent to below 3 percent.   Inflation in Sri Lanka dropped to below 1 percent as well. “The evidence clearly proves that Bangladesh economy would have been in a better shape with lower inflation, had we adjusted fuel prices in a consistent pattern and aligned it to international market prices,” said Biru Paksha Paul, chief economist of Bangladesh Bank.

Paul said lower inflation enables a lower interest rate, which stimulates growth after raising investment. At the end, higher consumption and higher output foster better fiscal capacity, justifying fuel price reduction on a priority basis, he added. 

The government's logic behind not passing the price benefit on to the consumers is that it wants to reduce the losses of BPC that imports fuel oils for the state.

Data shows that BPC logged a profit of Tk 5,268 crore in fiscal 2014-15 after covering a loss of nearly Tk 2,500 crore in the previous year. The profit figure would be much higher for the current fiscal year as BPC's import cost has decreased further.

According to a top BPC official, the final cost for a litre of diesel now stands at Tk 50, but it is being sold at Tk 68 at a hefty profit of over 35 percent. Diesel constitutes 80 percent of Bangladesh's fuel imports.

Salehuddin Ahmed, a former governor of the central bank, finds no logic in the government's stance on fuel prices. “The government is following no economic rationale in fixing the oil prices,” he said.

Falling oil prices are a boon for consumers and businesses across the world, he added.

Low oil prices do not only reduce costs of businesses and consumers, but also encourage people to invest and spend more, said Ahmed. “But the benefits are not being passed on to our people.”

Oil prices have been falling since June 2014. The initial fall was rapid and unexpected. The drop in the price of crude oil from June 2014 to June 2015 was around $80 a barrel.

This drastic fall was attributed to production that grew faster than projections. Demand also deteriorated faster than expected, resulting in excess oil for sale in the world. Recent events, such as a fall in Chinese growth projections and the end of sanctions against Iran, have given economists reason to downgrade their expectations for crude oil prices.