By Mandana Ismail Abeywickrema
The controversy surrounding the government's
delay in reducing the local fuel prices in
line with the decline in global oil prices
has intensified calls for the
re-establishment of a pricing formula for
the petroleum sector.
Financial analysts point out that a pricing
formula was a necessity for the local fuel
sector, while the government claims such a
formula would not be beneficial to the
Apart from a pricing formula, analysts also
say that subsidies should be given to
targeted groups rather than the present
across-the-board system where those who can
afford a price increase are also being
A pricing formula was first introduced to
the local fuel sector in 2001 during the
two-year tenure of the UNF government, when
fuel prices were revised on a monthly basis
depending on market prices.
At the time opposition politicians mainly
from one time coalition partner of the UPFA,
the JVP, condemned the pricing formula
claiming there was no need for a government
if prices were adjusted according to world
market prices every month.
World market plug
Some Marxists even went to the extent of
saying that once in power they would unplug
the country from the world market and
stabilise prices and bring 'benefits' to the
In 2004, when the UPFA government assumed
office along with the JVP as its main
partner, the government got rid of the
The decision to end the pricing formula
resulted in the government facing a huge
balance of payment crisis while also driving
the inflation rate into double digits. The
government in order to subsidise the fuel
sector had to resort to printing money
amounting to billions of rupees which
resulted in pushing the economy into a
Today a litre of diesel and petrol is sold
at Rs. 110 and Rs. 157 respectively.
Unions attached to the CPC have however
charged that the government is in a position
to sell a litre of petrol at Rs. 111
inclusive of all current taxes and profit
Petrol could be brought down
Sources from the CPC last week told The
Sunday Leader that a litre of petrol when
imported to the port costs Rs. 73. Even
after adding various charges and levies, a
litre of petrol comes to Rs. 111 a litre.
According to sources, if the government so
wished, the price of a litre of petrol could
be brought down even further as 550 mt. of
the 1,100 mt. of petrol used for daily
consumption is refined in the country.
CPC statistics reveal that 1,100 mt. of
petrol is used on a daily basis while 4,300
mt. of diesel is used daily.
Unions also claimed the reason the CPC is
not willing to sell petrol at a lower price
is because of the heavy losses incurred by
the institution due to huge debts from other
state institutions including the defunct
Recovering outstanding dues of the CPC was a
matter the government has to deal with
without burdening the people, the unions
CEB owes Rs. 40 bn
Meanwhile, Power and Energy Minister John
Seneviratne stated in parliament last week
that the Ceylon Electricity Board (CEB) owed
the CPC a sum of Rs. 40 billion.
Be that as it may, given the declining
global fuel prices, consumers have been
anticipating a decline in the local fuel
However, the government's announcement last
week of its "inability" to reduce fuel
prices in the local market came as quite a
shock as consumers as well as opposition
politicians argued that the government after
instantly increasing fuel prices when there
was an increase in the global fuel prices,
should not hesitate to pass on the benefit
of the decline in global oil prices to the
consumers as well.
The government has also said it did not have
any plans of introducing a pricing formula
for the fuel sector as it would 'create a
difficult atmosphere to the consumers.'
Petroleum and Petroleum Resources Minister
A.H. M. Fowzie told The Sunday Leader that
if there was a pricing formula for the fuel
sector, consumers would now be paying Rs. 30
extra for each litre of diesel sold.
First five months
He said that for the first five months of
the year, the government was selling a litre
of diesel at Rs. 80 when it should have been
"In January a litre of diesel should have
been sold at Rs. 88, in February Rs. 95, in
March Rs. 106, in April Rs. 120 and May Rs.
131. By May we had incurred a loss of Rs. 11
billion. Finally we increased the price to
Rs. 110," Fowzie said.
He pointed out that if a pricing formula
were in place at the time, the consumer
would have had to pay the difference between
the market and selling price.
Fowzie also said that even after increasing
the price of a litre of diesel to Rs. 110,
the government still incurred a loss on
diesel sales till September.
"In June the market price for a litre of
diesel was Rs. 139, in July Rs. 137, in
August Rs. 133," he said.
According to Fowzie, although the government
has earned a profit of Rs. 290 million on
fuel sales in the month of September, it is
only a 'fraction' of the losses incurred
during the other months.
Losses had increased
He said that by August, CPC losses had
increased to Rs. 17 billion, an amount,
which he says, the consumer would have had
to pay if a pricing formula was in place.
"A formula would have put the consumers in
trouble," he said.
Fowzie also said that the profits earned by
the CPC through its refinery, hedging and
sales of petroleum by-products were not
commensurate with the losses incurred by
fuel sales in the local market.
He added that reducing the local fuel prices
was doubtful as the world oil prices may see
an increase depending on the plight of the
US economy. "If Congress allows the printing
of money, then oil will go up to US$ 150,"
Cess on petroleum products
Speaking of the new cess on petroleum
products, Fowzie said it was a move to
curtail the profit the Lanka Indian Oil
Company (LIOC) would accrue when getting the
He added that the money received by the
government from the cess would be paid to
the CPC to cover its losses.
As for the large number of taxes imposed on
diesel and petrol imports, the Minister said
it was the case with most of the countries
and that it was not specific to Sri Lanka.
"Any government makes its budget based on
taxes. Apart from the war, the government
needs money for other development activities
and taxes are a revenue generating measure,"
Fowzie reiterated there was no decision by
the government to reduce the local fuel
prices and to introduce a pricing formula.
Pricing formula necessary
Economist, Dr. Harsha de Silva says that a
pricing formula is a necessity as the whole
idea is to pass the prices to consumers, so
that demand could reflect market reality.
He said that if local fuel prices were
increased with the global prices, people
would use less fuel reducing the country's
fuel imports. "When fuel prices are held
below market prices, people use more and the
subsidy would also increase the fuel import
bill," he explained.
He also said that when fuel is subsidised,
the Central Bank is called in to print
money, a scenario witnessed in 2004 and 2006
when money printed to subsidise fuel led to
many economic complications.
According to Dr. de Silva, the high fuel
prices and the resultant electricity tariff
increase reduces the country's
competitiveness in the foreign markets.
He added that given the high inflation rate
and the overvalued exchange rate, the
government should try to pass on the benefit
of the decline in oil prices to the private
sector to be competitive.
Economy no fairytale
Dr. de Silva disagreeing with Minister
Fowzie's comment that a pricing formula
would not be beneficial to the consumers
said that the economy is not a make-believe
fairytale, but harsh reality.
He noted that subsidies bring about
unnecessary inflation pressure on everyone.
"If the government prints money to subsidise
fuel, everyone will have to pay more for
everything as a result," he explained.
His suggestion was that if prices were
increased to reflect reality, only those who
use the commodity most would be affected
while the others would not. He also said
that the segment of society that was unable
to bear the high price should be given a
"It is better for the government to pass on
the actual prices and have targeted
subsidies for those who cannot afford," Dr.
de Silva said.
While the debate continues on reducing fuel
prices, the main opposition UNP has filed a
case before the Supreme Court pleading a
reduction in local fuel prices while the
Marxist JVP last week, after a long silence,
took to the streets calling on the
government to reduce fuel prices.
Minister's hollow argument over diesel
Petroleum and Petroleum Resources Minister
A.H.M. Fowzie dismissed allegations levelled
against the CPC that it had sold diesel to
certain ships docked at the Colombo harbour
at prices less than the current selling
According to employees attached to the CPC,
the Corporation had sold diesel to several
ships at Rs. 95.14 while the current selling
price of a litre of diesel is Rs. 110.
The employees further alleged that at a time
the CPC was claiming to be incurring losses,
the Corporation was selling fuel to several
ships at Rs. 14.86 less than the selling
The employees claimed that since September
18, there have been 30 such sales made and
invoices bearing numbers 4802866, 4802865
and 4802864 were just a few of them.
Responding to this allegation Minister
Fowzie said that there was no such underhand
deals and that fuel was provided to the
ships through the CPC's latest venture,
"We have been into bunkering for about four
months now and these ships were sold fuel
through that," he said. Fowzie said that in
bunkering as well fuel is sold at the
current market price.
"When a litre of diesel costs Rs. 127, it
was sold to the ships at that price. At the
time, a litre of diesel in the local market
was Rs. 110," he said.
According to him, the ships were sold diesel
at Rs. 95.14 a litre, as it is now the
current market price of diesel.
"That is why diesel was sold at such a
price," he said, adding that it was the
"formula" adopted in bunkering.
"If we do not apply this formula of selling
fuel at market prices to ships in bunkering
we will lose the business to Singapore,"
What the Minister has admitted by default is
that selling diesel at Rs. 95.14 is also
profitable, hence not being prepared to
"lose the business to Singapore."