Fuel for thought

Published On: March 23, 2019 08:43 AM NPT By: Purushottam Ojha

The streets of Kathmandu witnessed yet another agitation in the never-ending series of protests staged by students unions against petroleum price hike by Nepal Oil Corporation (NOC). It has become bit of a ritual: there is a price hike, followed by protests, stage-ins, general strikes and targeted vandalism of government vehicles.

People from different walks  resurrect the rhetoric of corruption, mismanagement, leakage and inefficiency of the state owned oil monopoly on such occasions and present different options for dealing with the growing price of petro products. Political leaders often resort to finding some scapegoat to calm down the street rage.  

Formation of investigation commissions and reform committees has been a saleable option. They produce thick reports, only to gather dust at some ministry for years on end. Normally, government officials do not even have the time to clean up the dust, let alone implement the recommendations in the reports. This is the reason people often equate the behavior of government authorities to that of a lizard in a Nepali folklore: it promises to build a shade whenever there is rain and forgets about it once the rain is over, only to repeat the same promises again. The issue of reform in the petroleum sector becomes a hot debate in the media and elsewhere whenever the street is heated with burning tires and enflamed vehicles, then soon disappears from the limelight. 

A hydro rich country with 12-hour daily load-shedding and staggering yearly increment in consumption of fossil fuel is a great irony. Every drop of petroleum product we consume is imported and there are currently no reliable home-made substitutes, never mind the feel-good talk about hydropower, solar and wind energy. The use of biogas is limited to the southern plains and lower hills as temperate climates in high mountains do not support biogas plants. In such a situation, fossil fuel has been indispensable for urban and peri-urban dwellers. Sustainable use of petroleum products thus has become an imperative; unless clean and renewable energy can be harnessed as a reliable substitute.

Trade in petroleum products has remained the monopoly right of the state since the very beginning. This is one of the reasons NOC is squarely blamed whenever there is interruption in supply or increase in price, without properly considering all the factors behind the price rise. In determining the price, three important nodes in the supply chain are considered important. 

The first relates to the method of determining import price at the source based on international prices; the second relates to the transportation of petroleum products from the import sources to the storage facilities of NOC; and the third to the cost of distribution from the storage tank to the point of nozzle sale. A large number of private businesses are involved in the second and third stages of this supply chain as these traders or service providers are guaranteed profit from the cartels and syndicates they operate. 

Price determination of petroleum product has hence always been a murky business and a kind of hide-and-seek between supplier and consumer. The reason is absence of strategic policy, particularly pricing policy in the petroleum sector. Petroleum products are used by all segments of the society, although the frequency of use depends upon the economic status of the user. 

For instance, petrol is usually consumed by middle to higher classes who use cars and motorcycles in their daily business. But diesel is widely used in public transportation, industrial production and for agricultural farming although a range of SUVs, luxury cars and jeeps also uses diesel as fuel. The use of LPG is becoming universal as many rural households that are connected with dirt roads are also using it as fuel for their kitchen. 

The numbers of such users have been increasing at a fast clip during the last decade, as evidenced from the spurt in sale of LPG cylinders. But the use of kerosene is decreasing due to availability of solar and other alternative sources of energy for lighting the household on one hand and easy availability of LPG as alternative fuel on the other. Thus market segments and users of these products are different and hence needs different supply policies.

In any good economy, the price is determined by the interplay of market and competition, rather than noneconomic forces and monopolies. In the first place, international oil market is monopolized by the oil producing countries through OPEC. Nepal or any other importing country has no power over this international cartel and has to accept any price on offer. The steady weakening of Nepali rupee against the dollar in the last four years (by more than 40 percent) has created a big chasm between the purchasing power of Nepali consumer and the international price of petroleum products. 
In such a situation, the state monopoly in NOC has been the target of anger of the discomfited consumers. Bringing private players in oil business as NOC’s competitors in import, transportation, storage and distribution of petroleum products would help create a more competitive market, albeit on a limited scale. Bringing private players in the oil business under a strong regulatory mechanism has been one of the constant recommendations of various commissions and committees constituted in the past. These vital recommendations are yet to be implemented. 

It is a hard truth that the prices of petrol and diesel are higher in Nepal (in absolute terms) in comparison to prices in the United States where the market is the determinant of the prices, never mind the high purchasing power of the people there. Diesel, kerosene and LPG are normally sold at suppressed prices in the neighboring India, Bangladesh and Pakistan in view of the wider impact of these products in the daily lives of common people. Nepal cannot simply expose the common people to the vagaries of the market.  Subsidizing LPG and diesel to the needy people through an effective public distribution channel was widely discussed (even proposed) several times in the past, but these recommendations too are yet to be translated into reality. The government should demonstrate the courage to implement targeted subsidy combined with market based transparent pricing mechanisms if the reoccurrence of street violence in the name of petrol, diesel and cooking gas is to be done away with. 

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