Energy pricing issues in Ghana

Energy page (Graphic Business) December 16, 2008

The petroleum sector witnessed one of its turbulent times in history since the inception of the national Petroleum Authority. The worse was the last four month where the price turbulence with regards to the international crude prices. Price of crude oil which stood at $147 per barrel as of mid July is now hovering around $50 per barrel on the average over the last month. In Ghana, the prices of petroleum products which are pegged according to what pertains on the international is also responding positively although consumers are not enjoying the full benfits. Charles Benoni Okine examines the NPA and its mandate and analyses the future of the regulator and the prices reviews.

One of the major headaches of governments in the past has been the review of petroleum products on the local market. This is because the government had a direct hand in the pricing of the products. The situation had made governments which presided over such price regimes unpopular most of the time in that, whenever the national budget and government's economic policy for the year was to be read, the populace knew that the prices of petroleum products will go up no matter how marginal. Anytime this was done, the prices of goods and services also jumped up to correspond with the increases in the prices of petroleum products.
On many occasions, the price increase were not announced to correspond with the prevailing market price of crude oil on the international market. Instead the prices are raised more as a hedge against any future rise in the price of crude oil.
It was against this background that the government decided to deregulate the petroleum downstream sector with the establishment of the National Petroleum Authority (NPA).

Brief for the NPA

The mission of the NPA is to regulate, oversee and monitor the petroleum downstream industry to ensure efficiency, growth and stakeholder satisfaction.
"Together as a team and in collaboration with our stakeholders, we shall institute appropriate measures to achieve full de- regulation of the sector. We shall ensure transparency, fairness and firmness in all our activities". It is to ensure an efficient, highly motivated, high calibre human and state - of- the- art technology that shall constitute the bedrock of its activities.
Its vision is simply to drive the Petroleum Downstream Industry to perfection.
A per its mandate, the NPA is to regulate, oversee and monitor activities in the petroleum downstream industry and where applicable do so in pursuance of the prescribed petroleum pricing formula; To achieve the object, the Authority shall; Monitor ceilings on the price of petroleum products in accordance with the prescribed petroleum pricing formula; Grant licenses to applicants under this Act; Maintain a register and keep records and data on licenses, petroleum products and petroleum marketing service providers; Provide guidelines for petroleum marketing operations; Investigate on a regular basis the operation of petroleum service providers to ensure conformity with best practice and protocols in the petroleum downstream industry as well as collect and compile data on; (i) international and domestic petroleum production, supply and demand; (ii) inventory of petroleum products, and (iii) pricing of petroleum products among others.

Consumer perception:

One of the thoughest duties of the NPA when it was established was how to review prices of the petroleum products on the market anytime the crude oil prices change on the international market. Consumers had been used to annual price reviews and the decision to make it a quarterly review initially did not work well.
However the NPA braved the storm to start the reviews on a quarterly basis and later changed it to monthly and then to the present fortnightly changes.
Although consumers have accepted the way the reviews are done they had this to tell Graphic Business on their perception;
Mr Yaw Aboaden-Atta, an upcoming investment consultant said; "it is okay the way the pricing is reviewed but I do not understand why the percentage increases are always more than the downward price reviews." he argues that if the prices are increased on the international market by a certain percentage, say 10 per cent, NPA would review by the same percentage to reflect the international crude price. However, he noted that where there is a similar percentage price drop, NPA will come down at maximum of five per cent. "If they are questioned, they will to do economics by brining in so many factors such as the prevailing interest rate, inflation among others but when it is the reverse, they hold all other things constant; That is not fair to us".
Nii Armah Aryee is a trotro driver at the Nkrumah Circle also complained about why the NPA feels reluctant on many occasions to review the prices downward even when the prices of the crude oil had dropped significantly.
Nana Ama Koomson, a trader was worried about why the NPA did not ensure that the prices, when reduced, take effect from the moment it is announced. To her the guys at the pumps hold the old prices for a while before reducing them and added "that is not fair to us and must be checked".

Petroleum Debt.

One of the reasons for the deregulation of the petroleum sector was also to ensure that the Oil Marketing Companies (OMCs) played a role in the importation of crude oil into the country either in its raw state, semi-processed or fully processed to ensue greater competition in the market. The Tema Oil Refinery (TOR) which, was the sole importer of crude oil into the country had run into serious debt that sent the banking sector almost to its knees as a result of huge borrowing from the government to finance crude oil importation. Unfortunately, the prices of the crude oil on the international market was not commensurate to the prices of petroleum products sold to consumers. At the time (2000), debts run into more than $240 million. To recover the debt, the government imposed another tax on petroleum products known as the Debt Recovery Levy to enable consumers 'cough' out what they enjoyed.
A similar situation hit the country in the wake of the unprecedented rise in crude oil prices on the international market when prices skyrocketed to $147 per in July, one of the highest in history.
As the prices rose, the NPA continued to raise the prices to avoid incurring any debts until the President had to intervene with a package that covered the petroleum sector. The NPA had no option than to halt the increase in prices of petroleum products at $118 per barrel and in the end incurred a debt of about $168 million. Today, although the prices of crude oil had reduced by more than 100 per cent since it reached its highest point in years, consumers are not enjoying it to the maximum because according to the NPA, there had been an agreement with the major importers including TOR to recover the amount over a period.

NPA Explains

The NPA told the media that the last downward review of petroleum prices is not the actual reflection of the drop in the price of crude oil on the international market.
It explained that the move was purely intended to ensure a recovery from the huge losses that had been incurred over the period when adjustments in the prices were frozen in May when the prices reached.
The Chief Executive of the NPA, Mr John Attafuah, noted that “the average decrease by our calculations was about 17 per cent but the authority, in consultations with the wholesalers, allowed only an average of 10 per cent reduction in the ex-pump prices to allow for the recovery of some of their losses”.
Analysts and members of the public had challenged the authority to come clean on the review as announced since November 1, 2008 because the percentage reduction in the prices was not a true reflection of what had transpired with respect to the downward prices on the international market.
The NPA boss said as per the arrangement between the NPA and the wholesalers, the recovery per month would be $12 million until the losses incurred had been fully recovered.
It had been the complain from consumers that the prices quoted by the NPA were not down enough considering the drop in the prices of crude oil on the international market.
But the NPA explains that two very important factors used in the determination of petroleum product prices on the local market are world prices of crude oil and products and the exchange rate between the cedi and the US dollar. While the prices of crude oil and petroleum products were on the decline on the world market, the dollar, on the other hand, strengthened against the cedi, thereby making the local prices of petroleum products still high, compared to those set on May 3, 2008.
It was clear that although the price for premium in US dollar per litre was below the May 3, 2008 level from September 1, 2008, the price premium in Ghana cedi per litre was higher than the May 3, 2008 figure”.
It was not until October 16, 2008 that the price of premium, 70.850Gp per litre, started going below the May 3 levels of 76.3682Gp per litre.
The NPA was of the strong view that the impact of the exchange rate on prices is the same for all the petroleum products.

Conclusion:

In many parts of the world, the effect of the soaring crude oil prices and food crisis forced many on the street protests in ‘mighty’ United States of America (USA) and other parts such France.
But in Ghana, this did not happen and although the economy suffered, its resilience made it able to withstand the shocks although the situation forced the crude oil import bill from about $760 million per annum to almost $2 billion.
Undoubtedly, the present scenario on the international market has made all to breath a deep sigh of relief and Ghanaian consumers are no exception. It is only expected that the NPA will continue to live up to expectation by reducing the prices further downwards to reflect what pertains on the international market as far as crude oil is concerned.
Another issue is about the autonomy of the regulatory body as this was brought to a test in the heat of the crisis. Although the NPA denied any government interference as far as the halt in the review of the prices was concerned, it was obvious from the interventions as announced by the President.
What analysts are asking is that, at what point will consumers to told about the payment of the debt and how it will impact on the percentage reduction should the world price for the commodity continue to drop.
In spite of all the diffuclties, analysyts believe that the establishement of the NPA has taken off the burden of the government in announcing petroleum prices even in difficult times. Today, prices change and yet consumers seldom concerned because they have come to accept that unless they are made to pay realistic prices of petroleum products, the economy can be affected in a negative way particularly when the crude oil prices soar as happened mid year.