Fuel price on par with global trends - Verité

By Lalin FERNANDOPULLE

A study of global crude oil price trends in comparison fuel price trends in Sri Lanka demonstrate that increases in fuel prices follow a similar trend to global oil prices.

This tracks price changes from November 2005, using it as a reference point marking a new policy regime. Price changes in petrol, have in general tended to track price changes in crude oil over the period.

However, especially since about September 2007, tracking has been with lower amplitude -- demonstrating lags and stickiness with regard to both upwards and downward changes.

In other words, sharp increases and decreases in crude oil prices have resulted only in moderate increases or decreases in petrol prices and that too after some delay.

The recent increases since October 2011 are different in that the rate of increase in petrol prices has been significantly higher than the increase in crude oil prices – instead of being significantly lower, as it has been in the past. Since October 2011, crude oil prices have increased by less than 14 percent (even after taking account of exchange rate depreciation in February 2012), while petrol prices have increased by 19 percent.

Despite this, it should also noted that the total percentage increase in petrol prices since November 2005, remains less than the total percentage increase in crude oil prices in that period.

Diesel price changes too have generally tracked oil price changes, and once again with significant lags and stickiness with regard to both increases and decreases.

From September 2010 to October 2011 the increase in Crude Oil prices is hardly reflected in the price of diesel. Since October 2011, however, diesel prices have increased by as much as 51%. This sharp increase reflects then a possible change in

policy with regard to substantially minimizing the effect of global price increases on the local price of diesel.

The February 2012, increase in diesel results in the total percentage increase of diesel prices since November 2005 being greater than the total percentage increase in oil prices in that period. (It should be noted that diesel is also generated from the same crude oil, and the cost of producing diesel is almost the same as producing petrol).

US Retail Gasoline Prices have been converted from $ per gallon to Rs. per litre. A further comparison with prices in the US suggests that Sri Lanka could reduce prices through improvement in refining efficiency and purchasing strategy.

A comparison between Sri Lankan and US retail petrol prices demonstrate that the changes in prices have seen relatively similar trends. US prices, however are lower in absolute terms by as much as Rs. 38/-per litre at present and demonstrate that

Sri Lanka could probably benefit from greater efficiency in purchasing and refining.

The lower taxes in the US (approximately 12percent on petrol as opposed to 25 percent in Sri Lanka) account for less than 25 percent of the difference in price. Petrol in the US is supplied by the private sector. While the US is an oil producing country, the world market rates of crude remain the cost determinant for the private sector in the US, as it is for Sri Lanka.

Therefore, a higher degree of efficiency in refining as well as strategic purchasing of crude oil in futures markets (as opposed to the

premium priced spot markets favoured by Sri Lanka) may be helping the US consumer to enjoy lower prices for petrol than consumers in Sri Lanka.

Crude oil prices have been converted from $ per barrel, to Rs. per barrel, using the exchange rates at the relevant period.

All prices, (i.e. Crude oil prices, Lanka Auto Diesel prices and Lanka Petrol prices) have been set to a base of 100 from November 2005. The United States measure of a gallon is less than that of an imperial gallon