Friday, 03 May, 2024
The government bumped up the fuel oil price in the local market in November 2021, when a barrel of Brent crude, a global benchmark of crude oil, used to sell at USD 84 in the global market.
Three months later, the onset of the Russia-Ukraine war in February 2022 pushed up the global price of crude oil to over USD 100. It prompted the government to hike the local market price by 42 to 51 per cent in August last year.
However, the price of Brent crude fell to USD 94 per barrel when the government announced the price hike.
While raising the price, the government had repeatedly promised to adjust local prices of fuel oil later in line with the global trend.
But the reality is in contrast as the price of Brent crude dropped to USD 73 in the global market, but there is no noticeable initiative from the government to slash the price in the local market.
The country saw a remarkable jump in inflation throughout the previous months. Inflation crossed the 8 per cent mark in January and the 9 per cent mark in March. It peaked at 9.94 per cent in the previous month, lowering the people’s purchasing power.
Aside from Brent crude, other commodities also experienced a downward trend in their prices in the international market. But the local market felt no impact of the falling price.
Against such a backdrop, experts have called for a reduction in fuel oil price in order to rein in inflation. They believe the situation would not turn so acute had the dollar exchange rate raised in phases.
According to the Center for Policy Dialogue (CPD), there is scope for slashing prices of fuel oil, including octane, petrol, and diesel, by Tk 5 to 10 per litre at the consumer level.
The Bangladesh Petroleum Corporation (BPC), a government agency that procures oil from the international market and sells it locally, now makes a profit of Tk 5 per litre from diesel and Tk 13 per litre from octane, according to the research institution.
A hike in fuel oil prices impacts the entire commodity market as it pushes up transportation and production costs for industries, agriculture, and power generation.
The developed nations have also struggled to cope up with the high fuel prices in the global market, with some European countries and the United States reporting the highest levels of inflation in four decades.
They have successfully managed inflation by consistently adjusting policy rates, a strategy Bangladesh is yet to implement.
In Bangladesh, the fuel oil is sold at a price fixed by the government and it always takes some time to adjust the fuel price in line with the global market.
The local fuel market is non-competitive due to lack of private sector participation, with exception for liquefied natural gas (LNG). The consumers are left with no choice but to purchase fuel at the government-set uniform prices.
The government generally procures oil under long-term contracts. Even if the prices drop later in the global market, the government has to maintain the contract prices, be it higher or lower.
The Organization of the Petroleum Exporting Countries (OPEC) and its allies are trying to curtail oil production, in an effort to raise the oil price in the global market.
Saudi Arabia, as the leading exporter, wants to keep the crude oil price above USD 80 per barrel to maintain balance in its budget and support Crown Prince Mohammed bin Salman's ambitious infrastructure projects.
According to Goldman Sachs, the actions adopted by Saudi Arabia may result in a moderate rise in oil price, ranging from USD 1 to 6. But it is unlikely to have a significant impact on consumers or pose a threat to gasoline prices in the United States, where pump prices are currently 25 per cent lower than last year.
Meanwhile, Russia continued to inject a substantial amount of crude oil into the global market to strengthen its war-torn economy. It ensured ample supply of fuel oil to the market.
Moreover, a slowdown in the global economy, particularly in China, has restrained the oil prices from experiencing significant growth in the international market.
Ministers in Bangladesh have repeatedly noted the volatility of the oil market and the uncertainty in price fluctuation. It is true that their concerns are logical. But it is also true that the fuel oil prices are less likely to rise in the longer run. The prices do not rise substantially due to the inherent dynamics of the global market.
Bangladesh Petroleum Corporation (BPC) imports crude and refined fuel oil to meet the domestic demand.
According to the economic review in 2023, the BPC incurred continuous losses as it has been selling fuel oil in the domestic market at prices lower than the international market. As a result, the government has to provide a significant amount of subsidy on fuel oil.
However, the government did not provide any subsidies on fuel oil from FY16 to FY21 due to the low price in the global market. Therefore, The BPC bagged a profit of more than Tk 430 billion in the seven consecutive years. The net profit stood at Tk 367 billion after deducting Tk 77.27 billion in tax.
Later, the escalating Ukraine-Russia war led to a surge in fuel oil prices globally in the second half of the fiscal year 2021-22, causing a loss of Tk 27.05 billion to the BPC. According to the economic review, the BPC registered a loss of Tk 70.87 billion in the first seven months (July-February) of the ongoing fiscal year 2022-23.
As per the condition set by the International Monetary Fund (IMF), the government has decided to implement a new formula-based fuel oil price from September. The government initially contemplates adjusting fuel prices after every three months.
In this regard, Dhaka University professor Selim Raihan said reducing oil prices would be beneficial to all sectors given that the country's inflation rate has now surpassed the threshold of 9 per cent.
However, it remains a question to what extent the price will be reduced. It has been proposed in the budget to impose a certain amount of duty on oil imports. It means the government will collect a certain amount of duty regardless of the oil price. In this circumstance, the oil price would not subside to a remarkable extent, he added.
Professor Selim Raihan further proposed tapping into the potential of importing oil through entities other than BPC and introducing a competitive market. If some other companies can import oil from different sources at lower prices, it would benefit consumers and promote a competitive environment.
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