Crude oil prices hit 10-month high

Spiralling effect on CCPI

by Gamini Warushamana

Crude oil prices in the international market rose to a new 10-month high last week and Bloomberg crude future recorded $71.85 per barrel on Friday. Crude oil prices reached the highest record level in August last year surpassing $76 per barrel.

The reason for the increase in oil prices in the recent months is the concerns over the US refining capacity not keeping pace with demand, international oil analysts said.

"The most recent rally, which has boosted oil prices above $71 per barrel for the first time in 10 months, was driven largely by a report from the US Energy Department's Energy Information Administration last Wednesday showing that gasoline inventories fell when analysts had expected an increase", AP reported.

On June 29 the government increased fuel prices for the sixth time this year in keeping with the crude price increase.

Accordingly petrol prices were increased by Rs.5 to Rs.111 per litre, diesel by Rs.4 to Rs.71 per litre and kerosene by Rs.16 to Rs.67 per litre.

Meanwhile, economic analysts said that the fuel price increase would shoot up prices of all commodities on account of increased transport costs leading to an increase in the cost-of-living.

The Colombo Consumer Price index would increase by 2-3% subsequently due to the price increase.

The increase in the price of kerosene by Rs.16 would affect the index sharply, because there is a higher weight for the commodity in the outdated index. Fish and vegetable prices will also go up and the index is highly sensitive to these prices.

The market reacted to the increased fuel price and the bus fares were increased last Wednesday by 16-18% and rail fares will also be increased by September, after some improvements to the service.

The government has limited options to cushion the impact of crude oil prices in the local market, analysts said.

The only viable option is to reduce the tax on petrol, but this would cause a serious revenue loss. However, a tax cut on petrol would not influence commodity prices. International crude price contributes 57% of petrol prices, 84% of diesel and 85% kerosene prices in the market.

The tax on petrol is 34%, diesel 6% and kerosene 4%. The Ceylon Petroleum Corporation has only a 1% profit margin from all three fuel categories and the dealer margin is 2%.

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