Fuel prices have been, and continue to be a deciding factor of prices of other essential commodities in several countries, including Sri Lanka. The increase or decrease in fuel prices has an impact on several other aspects of our daily lives, from bus fares, to prices of vegetables. Today, as far as the world market is concerned, the price of crude oil has been on a slump. But, Sri Lanka has not reduced or adjusted fuel prices after January 21 last year when the current government presented its first budget proposals after coming into power.

However, according to the latest External Sector Performance Review by the Central Bank of Sri Lanka (CBSL), the country has spent USD 2.4 billion on fuel imports between January to November last year, a 43.8 percent reduction to the amount spent during the corresponding period the previous year. Sri Lanka had spent almost double (USD 4.3 billion) for fuel imports in 2014.

Experts point out that for a country like Sri Lanka, a drop in crude oil prices would prove to be a boon since it would give an opportunity to increase the income by retaining, or making subtle adjustments to the fuel prices in the domestic market.

While some may argue that Sri Lanka should reduce fuel prices in line with the global prices, experts point out that countries like Sri Lanka cannot reduce prices just like that.

Petroleum Analyst at the Petroleum Resources Development Secretariat (PRDS), Ranali Perera speaking to Nation said that there were several factors, internal and external, which played crucial roles when deciding on fuel price revisions. She pointed out that the country’s domestic economic environment played a key role when deciding on a price revision.

“In the case of Sri Lanka, it has to take into consideration the domestic economic
environment. The government should take into consideration the impact it could make on the country’s economy since there are several sectors that are fuel driven,” she said.
In addition, she also stressed that costs, apart from import export expenditure, should also be taken into consideration. “There are additional costs involved, such as cost of refining crude oil that has been imported. Cost factors such as these also have to be given a serious thought before revising fuel prices,” she added.

As a step towards addressing this issue, the Sri Lankan Government had been working on a pricing formula. The formula, according to the Ministry of Petroleum, had been formulated and had been given to the cabinet to be approved. The formula which was supposed to be out and implemented in October last year is yet to see the light of day.

Perera stressed that the introduction and implementation of a pricing mechanism was a must at this juncture in order to streamline the pricing of fuel. The formula was designed in such a way that it could be updated every six months, depending on the price changes in the world market.

Perera, however, stated that there wouldn’t be a big fluctuation in oil prices at least until the end of this year. “There could be a change by mid next year. But that also depends on the Organization of Petroleum Exporting Countries (OPEC). We have no control over the pricings,” she added.

According to Ceylon Chamber of Commerce, Chief Economist, Anushka Wijesinha, this excess supply is the result of high supply of oil from OPEC countries, supply of shale oil, gas from the US, new oil production from Iran and reduction in demand for oil caused by the slowdown in major global economies.

Sri Lanka, as an oil importing country, both gains and loses from the slump in global oil prices. “This is a welcome respite for our balance of payment situation. This also
provides a unique ‘breathing space’ for the government to undertake much overdue energy sector reform. At the same time we should take this opportunity to introduce a robust pricing formula. This will help consumers benefit better during oil price drops, and will ensure state entities involved in fuel supply don’t suffer from having to keep artificially low prices during oil price rises.”

However, the global oil price drop has its negative impact for Sri Lanka. According to Wijesinha Middle East and Russia are two of the major export destinations for our tea. They have currently reduced their export demand and the fall in oil prices is one factor that has resulted in the decrease of their export demand, alongside geopolitical tensions and ruble collapse. At the same time, the remittances from the migrant workers in these economies would be lowered, as a result of budgetary strains in Gulf states due to lower oil revenues and negative wealth effects.”

Basket (ORB) is the weighted average price of the different petroleum blends produced by the Organization of the Petroleum Exporting Countries (OPEC). The ORB is an important benchmark for crude oil prices and consist of Saharan Blend (Algeria), Girassol (Angola), Oriente (Ecuador), Minas (Indonesia), Iran Heavy (Islamic Republic of Iran), Basra Light (Iraq), Kuwait Export (Kuwait), Es Sider (Libya), Bonny Light (Nigeria), Qatar Marine (Qatar), Arab Light (Saudi Arabia), Murban (UAE) and Merey (Venezuela). The ORB peaked on March 15, 2015, with a price of US $62.16 per barrel, with a steep decline in prices during the following three months. By August 15 the price per barrel was US $ 45.46. This remained almost stable until 15th of October. For the rest of the year, oil prices showed a steep plunge and recorded a dismal US $ 26.50 per barrel on January 16, the lowest oil price for more than a decade.

OPEC Reference (2)