“Skyrocketing crude oil prices- a major concern, calls for further fuel subsidy”
IN April, 2020 the crude oil price fell to $18 a barrel and dealt a severe blow to oil producing and exporting countries.
Shockingly, most oil importing countries were unable to utilise the opportunity presented by the fallen crude oil price due to a myriad of challenges which included a weakened currency due to the impact of Covid-19 pandemic.
Fast forward to end of April 2021, the crude oil price has risen by over 200 percent; a situation which has caused major concerns as most economies are still fragile.
Indeed, the skyrocketing crude oil price is causing significant challenges for the global economy; Zambia included. Between October 2020 and to date, crude oil price has increased by about 75 percent.
While this is good news for oil producing and exporting countries who suffered severe ruin when the crude oil price fell to $18 a barrel, this is certainly not good news for oil importing countries especially African countries which include Zambia.
At the moment, most African economies including Zambia are still fragile and contracting due to the sabotage caused by the outbreak of a global pandemic-coronavirus.
The business environment is strained and a general public just recovering while in some cases, the recovery has not yet started being felt. With a recent OPEC meeting held on March 4, 2021 refusing to increase production significantly, the intention is clear. Demand for oil has been increasing with global economies opening from shut down and driving the price upward.
The pressure Governments are facing is whether to increase the fuel pump price and thereby potentially harm fatigued public or slide into further fuel subsidies. Fossil fuel subsidies were a massive economic problem already before the coronavirus.
According to the International Energy Agency (IEA), in 2018 governments around the world spent US$400 billion to subsidise fossil fuels. The G20 countries are still giving subsidies.
For instance, according to a Global Subsidies Initiative (GSI) Report, Canada spent over 1.9 billion Canadian Dollars on fossil fuel subsidies in 2020.
According to the latest data from the Energy Policy Tracker, G20 governments have given at least US$233 billion in additional support through recovery measures to fossil fuel-intensive sectors since the pandemic began.
Subsidy expenditure on fossil fuel related subsidies by the G20 is believed to have reached at least half a trillion United States dollars during the Covid-19 pandemic according to a report released by the International Institute for Sustainable Development (IISD), the Overseas Development Institute (ODI), and Oil Change International (OCI).
Public relief in the ongoing Covid-19 environment has continued in form of direct and indirect subsidies of one form or another including stimulus packages.
Governments have pumped in billions of United States dollars to cushion the general public. The challenge is that the pace at which the crude oil price is moving upward is faster than the global economic recovery pace. This is a threat.
With regard to Zambia, a plethora of taxes on fuel have been suspended to cushion the public. Last year, Customs Duty at 25 percent was waived and still remains waived to date. At the onset of 2021 Excise Duty was suspended completely on Diesel while a small fraction was left on Petrol.
Not only that but Value Added Tax (VAT) at 16 percent was also suspended bringing the total taxes suspended to over 41 percent. Government has tried its best to support the general public otherwise the fuel pump prices would have gone up significantly.
However, the price of fuel; especially diesel on the international market has continued to increase thereby causing further challenges for the Oil Marketing Companies (OMCs) which are reportedly suffering losses from a diesel sales point of view.
This situation implies that further subsidies have to be extended to the general public without which fuel pump price hike could reverse and worsen the economic environment. Almost all governments globally have intervened with different forms of subsidies to support their economies.
In the wake of challenges like this, a lot of lessons will be harvested aimed at minimising the number of volatile variables in the supply chain. With OMCs importing from different sources which include buying from sister related or global parent companies while others buying from open markets, it will remain a major challenge to control the landing cost within a regulated framework.
And this brings to the fore energy diplomatic efforts aimed actualising Government to Government bilateral agreements. Government is capable of negotiating a better price from certain jurisdictions and encourage private sector to import from those specific countries at a Government negotiated price. Another major lesson must lead to promulgating a Strategic Petroleum Reserve (SPR) policy.
An effective SPR policy is capable of attracting fuel investors who are capable of stock piling fuel which can last a minimum of 90 days national consumption on certain terms and conditions.
Reserves under this policy are not used except under specified circumstances. The reserves can be used as collateral among other derivatives. The reserves can be offloaded in the market after a certain period of time in order to allow investors recoup their money and restock again.
For instance, just last year, oil producers run out of storage facilities due to lack of demand for fuel after country lock down measures got implemented. Because some oil fields and some refineries could not be closed, fuel price fell into negative price in some instances.
With our expanded local storage facilities across the country, at least one oil producer or exporter could have been attracted to stock pile in Zambia’s near empty depots. To achieve this, a well-crafted SPR policy has to be in place.
*Johnstone Chikwanda is an energy expert and a Fellow of the Engineering Institute of Zambia, a PhD candidate at Johnson University, Knoxville, Tennessee, USA.
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