National 1 (Spotlight Weekly)

Uncertain Future

Whenever prices of petroleum products come down in the international market, Nepal Oil Corporation raises them

By KESHAB POUDEL

With the government's announcement on increasing the prices of petroleum products, they suddenly disappeared from the market creating panic and chaos, as cars queued up at the petrol pumps. As demand shot up, the petrol stations were closed down.

Following Deputy Prime Minister Badri Prasad Mandal's indication of the possibility of an increase in petroleum prices last week, petrol, diesel, LPG and kerosene suddenly vanished from the market.

Long queue at petrol station : Artificial shortage

For two days, the concerned officials remained tight-lipped about the reason behind the scarcity and panic. On Sunday, the Nepal Oil Corporation (NOC) issued a statement saying it has adequate reserve of petroleum products for a month. It is believed that tens of thousands of liters of petroleum products are illegally stored. Although the government took action against more than a dozen petrol pump, many are still reluctant to sell their products.

As the country is facing a severe economic crisis, increases in the price of petroleum products would have a negative impact on the economy. Transport entrepreneurs have already declared that they will raise their fare.

"The government can no longer afford the loss borne by the NOC, since it has already lost million rupees in subsidizing kerosene, diesel and LPG," said Deputy Prime Minister Mandal, announcing the government's relief package last week. "We must fix the prices on the basis of market forces."

When the government is running a deficit budget, it is in no position to continue subsidizing petroleum products. The NOC has already announced it has lost between Rs.600 million and Rs.700 million citing that prices are cheaper in Nepal than in India. The NOC also suggested that petroleum prices should be in conformity with prices in India.

"We have adequate reserves of petroleum products. I don't understand who created such panic. Of course, we have recommended an increase of prices, since the NOC is losing a huge amount of money," said Rudra Bahadur Khadka, acting general manager of the NOC. "Following the supply of petroleum products, the situation is now normalizing."

Being the monopoly organization distributing petroleum products, the NOC often recommends increases in prices whenever crude oil prices decline in the international market, saying it has incurred losses of billions of rupees.

Nepal's price structures are never compatible with the international market or prices in India. The NOC does not decrease the price when prices in the international and Indian markets go down.

After the oil crisis of the 1970s, crude oil prices skyrocketed. In 1980, per barrel price of petroleum product was over US$50. It fell to $12-15 per barrel in 1999-2000. It gradually has gone up since 2000. Despite the price fluctuation in the international market, Nepal's price structure has been on the rise. From 1993-1996, the prices of petroleum products remain unchanged, at Rs.29 per liter for petrol, Rs.12 for diesel and Rs.8.50 for kerosene.

In 1995, the price of petrol was increased from Rs.29 to Rs.39. It was reduced to Rs.34 the next year. It was again increased the following year. Major prices changes were announced in 2000 when the NOC nearly doubled the price of diesel and fixed the price of petrol at Rs.47. Diesel went up from Rs.13 to Rs.27.50 and kerosene from Rs.13 to Rs.26. The trend of international crude oil market was very much stable during that period, barring a rise for a couple of months. The average prices of crude oil remained at $20 in the period. The Nepalese currency, however, devaluated against the US dollar during that period.

Economists argue there is no economic rationale in citing the devaluation of the Nepalese currency for the rise in prices. "Despite the official claim, the prices of petroleum products in Nepal remain higher," said an economist.

Lack of Transparency

As Nepal has opened its market to competition, it is yet to open the supply of petroleum products to the private sector. One group holds the view that there is a need to invite the private sector or foreign companies in the distribution and supply of petroleum products, ending monopoly of the NOC.

There is a lack of transparency in the process of purchasing and selling petroleum. Nobody knows how the NOC sets the prices of petroleum products. "There is no reason to increase the prices of petroleum products at a time when prices are coming down elsewhere," said an economist.

Even before the approval of the price rise by the government, the new prices, up by up to 50 percent, were released in the market. Pumps find this a good time to maximize profits by storing thousand of liters of petroleum products.

Consumption of Petroleum Products

With the rise in market prices of crude oil in the international market, the government is bound to increase the prices of petrol, diesel, kerosene and LPG, which are heavily subsidized. As Nepal does not produce petroleum products, it is totally dependent upon the Gulf and other countries for its demand.

According to a report, Nepal imported 829,467 kiloliters of petroleum products, which costs the country about Rs.18.68 billion in 2057/58, a rise of about 4.1 percent from the previous year.

Among petroleum products, Nepal consumes diesel, kerosene, petrol and aviation fuel. Diesel occupied 40.2 percent, kerosene 39.2, aviation fuel 7.9, petrol 7.4 and L.P. gas 4.8 percent in 2057-58. The supply situation was changed in the first eight months of last fiscal year, when demand of kerosene went up. It occupied 45.5 percent of total consumption followed by diesel (33.2 percent), petrol (7.4 percent), aviation fuel (5.7 percent and L.P gas (5.5 percent).

This shows an increase in the consumption of kerosene in the last one year, as it is said to be cheaper. Since kerosene is easily mixed with petrol and diesel, there are frequent cases of adulteration.

As long as the NOC retains its monopoly on supply and distribution, the pricing of petroleum products in Nepal would remain haphazard.