World oil price fall:

Formula for lower fuel prices soon

by Gamini Warushamana

Global oil prices continue to tumble with current levels the lowest in over a decade. But Sri Lankans may have to wait longer to benefit.

Ceylon Petroleum Corporation Chairman, T. G. Jayasinghe rules out immediate price cuts but promises a new pricing formula early next year that could bring down prices.

Analysts warn, however, that sharply lower incomes of oil-rich countries could see less migrant labour demand in West Asia on the one hand and, less purchases of tea and other Sri Lankan products exported to those countries.

But industry and shippers are optimistic about the prospect of lower fuel costs leading to lower overall production costs.

Alternate power-based transport, such as hybrid automobiles, and non-fossil energy sources such as solar panels may see some market decline, local trade sources told the Sunday Observer.

CEO, Shippers’ Academy Colombo, Rohan Masakorala said the market dipped below $34 a barrel, indicating a positive output for 2016. The US has for the first time allowed crude oil to be exported as the US has become a leading producer with the introduction of fracking.

Iranian oil and Libyan oil may enter the market in 2016. We can expect even lower prices with demand stagnant. Some analysts say it may go below $30 a barrel.

Given the geo-political situation it is unlikely to see Saudi Arabia and Russia cutting output. As such lower oil prices are expected in 2016 and would be good for developing countries, Masakorala said.

This is good news for Sri Lanka as a large portion of our foreign exchange goes towards oil imports and sometimes over 60% of our electricity is generated using diesel.

This scenario would probably help the government to somewhat mitigate balance of payments issues, but other factors such as US interest rate hike will put pressure on our exchange rate.

Oil prices have fallen to their lowest level in 11 years as commodity markets responded to signs that the global glut of oil will deepen in 2016. In London, the price of benchmark Brent crude hit a low of $36.05 (£24.22) a barrel on Monday, its lowest since 2004 and below the low point reached during the financial crisis of 2008-09.While oil ministers from Qatar and Iraq sought to discuss the prospects of a recovery in oil prices, analysts said crude was likely to go lower in the short term, given that production is close to record levels at a time when demand has been affected by the slowdown in China and other leading emerging markets.

Oil prices have slumped by a fifth since a meeting of the OPEC cartel on December 4 failed to introduce any curbs on production, and are down by almost 40% in 2015 so far.

Managing Director and CEO, Chevron Lubricants Lanka PLC, Kishu Gomes said the slump in world oil prices help us, as a country with net import of crude, to better manage the balance of payment situation. However, our exports such as tea, spices, gems to oil producing countries will get impacted due to those economies suffering.

Also our foreign remittances from expatriates will be affected. It’s a vicious cycle but the benefits are far greater than its negatives for our country.

Chairman, Ceylon Petroleum Corporation (CPC) , T.G. Jayasinghe denied any possible reduction in local market prices soon.

He said the CPC will introduce a price formula to decide local market prices.“We have finalized a price formula for local petroleum prices and future price decisions will be based on this formula,” Jayasinghe said. This price formula was due to be submitted to the Cabinet last week.

The Secretary to the Ministry of Petroleum Resource Development, Sudarma Karunarathne said that all factors and variables that determine petroleum prices have taken into account the new formula. Crude oil price is the main factor but there are several other factors.

“We have to consider the financial position, profit and new investment needs of the CPC and other cost components. Today, local market price revision is ad hoc and has no scientific basis,” she said. However, she said that the main component that impacts local petroleum prices, government taxes, is not included in the formula. She said that tax is based on government policy decisions and, therefore, it has not been included in the price formula. Tax is the main cost component in local fuel prices and total tax is over 100%.

Economic analysts said that under the present macroeconomic conditions, a significant reduction in fuel prices cannot be expected even after the price formula is introduced.

There is a forecast Budget deficit of 5.9% or Rs.740 billion in 2016 and it further increased by around Rs.15 billion with revisions during the Budget debate in Parliament.

The government has no option other than the imposition of new taxes to bridge the gap.

Therefore, keeping petroleum prices unchanged and the advantage of lower crude oil prices to maintain macroeconomic stability rather than passing it to consumers is rational, said Dr. Sirmal Abeyrathne of the University of Colombo. Goldman Sachs, major global forecast has suggested that the oil price has a lot further to fall yet – and that it could go as low as $20 a barrel.

This is the extreme low ‘cost price’ predicted by Goldman Sachs for early next year.

The International Monetary Fund has hinted that global prices could fall this low when Iran increases its oil exports in the wake of the lifting of international sanctions. Chief Economist, CCC, Anushka Wijesinghe said oil prices are likely to remain at low levels for the most part of next year and Sri Lanka will continue to be a beneficiary of this as an oil importer.

- US shale gas and tight oil production continues robustly, although there is some recent consolidation of the sector given the low price era.

- OPEC continues its strategy of keeping volumes up to try and maintain market share in the midst of supply from competitive non-conventional sources from the US.

- These two factors will contribute to high supply of oil in the market.

- The new policy shift by the US government to lift its self imposed ban on oil exports will also contribute to a continued lower oil price.

- Projected slower growth in China and the periphery will also contribute to lower oil prices, albeit to a more limited extent than the earlier factors

- However, what will be the key deciding factor next year is whether Arab OPEC countries can sponginess this kind of a high volume and low price era given their high social welfare spending which is financed by revenue from oil exports during the high oil price era.