Friday, May 4, 2012

Petroleum product’s demand, supply, prices and never-ending queue at petrol pumps in Nepal

The long queue at petrol pumps, rationing of LPG, rising NOC’s losses due to increase in international prices on whose basis it purchases from the IOC, NOC’s inability of purchase enough fuel when the subsidy government is offering has to be shouldered by the corporation, and the MoF’s inability to either give sufficient funds to NOC or compel it to restructure (administration, leakages and prices) are recurrent issues. The web of interconnections among these baffles analysts and, as in many cases, beyond some point there is no logic to the fuel prices in market, losses to NOC and supply of fuel (thanks to politics!).

Anyway, here is how the prices of petroleum products are moving in Nepal. The increase in domestic prices do not entirely reflect the prices in the international market. On April 4, 1996, a liter of petrol cost Rs 31; Rs 40 on July 17, 1998; Rs 47 on October 14, 2000; Rs 67.25 on March 3, 2006; Rs 100 on June 9, 2008; Rs 77.5 on February 17, 2010; and Rs 120 now. The prices of diesel and kerosene have been fixed at the same rate since December 3, 2008, largely to stop adulteration. Currently, petrol and diesel prices are highest in Kathmandu and Surkhet (Rs 120 and Rs 89 per liter respectively). The lowest prices (Rs 118.50/L for petrol  and Rs 87.50/L for diesel) are in the border cities with India. [Fyi, POL means petroleum, oil and lubricants. One barrel is equivalent to 159 liters and 1 cylinder 14.2 kg.]

As of 2012-05-01, there is loss in sale of diesel and LPG, which are also the ones with the highest demand in the market. Before the prices were adjusted two months ago, the losses were even bigger than what are listed in the table below. The NOC currently owes Rs 23.17 billion to the government and various banks and financial institutions. Of the total loans, the NOC owes Rs 10.73 billion to the government, Rs 6.40 billion to the EPF, Rs 4.13 billion to the CIT and Rs 1.90 to banks and financial institutions.

Profit and loss as per IOC's rate as of 2012-05-01
Item Price
Petrol (MS) 3.71/Ltr
Diesel (HSD) -10.60/Ltr
Kerosene (SKO) 3.02/Ltr
LP Gas -598.34/cyl
Aviation Turbine Fuel (JET A-1) 14.39/Ltr (Duty Paid)
Aviation Turbine Fuel (JET A-1) 19.73/Ltr (Bonded)
Estimated total loss as of May 2012 - 1.1447 billion

Also be clear that the retail price of POL is high also because of high tariff (VAT, road tax and other charges), insurance and transportation charges, leakages, and NOC’s administrative costs. See the table below for the breakdown of costs for petrol, diesel, kerosene and LPG.

NRs Petrol/L Diesel/L Kerosene/L LPG/cylinder
Buying price as of May 1, 2012 from Raxaul 73.94 77.55 76.38 1530.32
Tariff 33.55 14.78 2.04 241.84
Interest on NOC's loan 1.47 1.47 1.47 20.87
Transportation cost and insurance 2.15 2.15 2.15 105.81
NOC's administrative charge 0.50 0.50 0.50 7.10
Technical leakage 0.98 0.59 0.50 1.39
Dealer commission 2.74 1.75 1.97 56.00
Insurance and transportation charge of dealer 1.24 0.82 0.97 50.00
Total price 116.29 99.60 85.98 2013.34
Retail price in Kathmandu 120.00 89.00 89.00 1415.00
Total monthly sales (KL, cylinder)   17,000     65,000               6,000      1,200,000

Load-shedding, petro demand and inflation

The link between international petroleum prices and inflation in Nepal has been strong since 2007, the same year when load-shedding increased substantially and demand for petroleum products skyrocketed. A recent study by the IMF economists showed that almost a third of the variability in domestic inflation can be attributed to the prices in India and movements of international oil prices. The study found that the responsiveness of food price inflation was significant and quick to spillovers from India’s food prices and the global oil price fluctuations before 2007. However, after 2007 the impact of fluctuating oil prices is more persistent than the spillovers of food prices prevalent in the Indian economy. Even though petroleum prices do not change readily in our economy as they do in the international market, the price fluctuations are seen directly and indirectly in the cost of imported inputs (and final products) used by agricultural, industrial and service sectors.

The consumption of diesel has increased by over 100 percent between 2007/08 and 2010/11 (from 3 lakhs KL to 6.5 lakhs KL). The increase in demand comes mainly from the industries as a result of drastic increase in load-shedding hours. The peak demand for electricity in 2007 and 2011 was 648.39 MW and 946.1 MW respectively. The available energy (NEA hydro, NEA thermal, purchase from IPP and India) in 2007 and 2011 was 3051.82 GWh and 3858.37 GWh respectively. While the average annual average growth of peak demand for electricity between 2007 and 2011 was 9.44 percent, the annual average growth of available energy was 6.98 percent. There is a huge electricity demand and supply gap (on an average the demand is 650-900 MW but supply is around 450 MW). Furthermore, driven by the increasing purchasing power and expansion of trading business (mostly commercial), thanks to remittances, the additional number of consumers has also drastically increased between 2007 and 2008 (from 1.3 million to 2.05 million). The increase in consumption of petroleum fuel (especially diesel and LPG) is inversely related to the supply of electricity (load-shedding hours) in Nepal.

Nepal imported about Rs 51 billion of petroleum products in 2009/10, which increased to Rs 75 billion in 2010/11 (a solid jump of about 45 percent). It is expected to surpass Rs 100 billion in 2011/12. Fyi, the total merchandise export of Nepal was just Rs 64 billion in 2010/11.

What is the solution?

Saving myself from repeating the same arguments on how to handle the situation, let me direct readers to my earlier detail piece on the sorry state of state-owned enterprises, including NOC. Brief points are listed below:

  • Adjust domestic prices with international prices (find other means to rein in on the impact of rising petroleum prices on inflation—NRB, MoCS, MoF, and NPC need to step up their efforts)
  • Minimize leakages, including offering freebies to staff and MoCS guys, and lay off unnecessary staff at NOC
  • Minimize political meddling in management, and improve governance and accountability
  • Let private players join the market
  • End syndicates and cartels in fuel transport
  • Increase storage facility, mainly to partially tame price volatility. The present storage capacity of 71,558 kiloliters is just enough for 15 days (based on the projected sales for 2009).

This is what happens when you ration products that have high demand in the market—it leads to a thriving black market. Petrol in mineral water bottles!