Petrol rationing: More corruption, little conservation

By the Economist

There are conflicting reports about whether the government intends to control the consumption of petrol or not. Reports that a rationing programme is on the cards has been followed by the Minister of Petroleum and Petroleum Resources saying that there would be a “free flow of fuel.” We are not even sure whether he is the authority deciding the issue. In any case he is referring to the prospect of oil resources in the country in the future, hardly the current situation. This is a long way off, may be even ten years ahead, as the detailed feasibility studies and contracts are yet to be worked out. Therefore we have to take his fuel with a pinch of salt. It’s a story of the future.

Meanwhile the country is facing a serious problem in its capacity to import its petroleum requirements. The severity of the international petrol shortages and the consequent inevitability of international price rises that this column highlighted several times appears to have been realised by the government at last. Besides the ballooning fiscal deficit and the trade deficit are causes for concern as economic instability is the order of the day. At this late stage the government is probably contemplating a programme of rationing petrol. There are many reasons why this programme may not achieve the intended objective of curtailing petrol consumption adequately to make a dent in the costs of petrol import costs. Besides, it is likely to lead to corruption as well.

First let us recognise that the severity of the problem arises only partly due to the oil prices. The need to control petrol consumption is due to the high costs of petroleum as well as the high costs of other imports, especially military hardware. These two items of imports have led to a huge trade deficit that keeps ballooning each year. In fact if defence imports rise then the deficit could rise even further this year than in 2006. It is in this context that the rise in prises of petrol leads the government to a drastic proposal of rationing rather than cope with the problem by merely increasing the price of petrol.

Apparently the proposal is to have a differential pricing system with a certain quota at a standard price and higher amounts to be purchased at a premium price. This is about the worst solution to the problem as it is an invitation to a highly corrupt bureaucracy and administration to further corruption. Even the other option of not having a dual pricing system but to only ration the amount of petrol is fraught with corruption though perhaps to a lesser amount. The simple explanation to this is that the bureaucrats will have a control on the issue of the petrol coupons that would have a value.

They would make it difficult for the legitimate persons to obtain the coupons. They would hand the coupons to either those who are influential, their kith and kin, or most likely sell it in the market. What this then does is to possibly increase the sale of petrol to a higher level than what a high price would achieve as some consumers who would not be able to buy petrol at the higher price will somehow sell their coupons to others. The net result is that petrol consumption may not be curtailed to the extent envisaged by the scheme.

However the reasons why a rationing scheme for petrol will not achieve the intended results goes beyond this argument. The fact is that petrol is an inelastic commodity in Sri Lanka. What this means is that people’s demand for petrol does not get curtailed by much by increases in the price. Apart from individuals whose demand is inelastic, the nation’s entire demand for petrol is even more inelastic. This is why the continuing increases in petrol prices over the last few years have not curtailed petrol consumption much.

Those who consume petrol most are least likely to curtail their consumption. The rationing scheme unless rigidly applied to these other sections of consumers will not achieve the result. Who are these other consumers? They are the government itself. The government consumption in this case comes from the President, Cabinet ministers, bureaucrats, police, military and other government agencies. Besides these there are the genuine needs that cannot be curtailed these include public transport, transport of goods and services, transport of essential agencies and most important the oil needed for the generation of power.

If the government is serious in curtailing oil consumption it has to increase the price of petroleum products. Differential pricing with rationing will yield limited results and unlimited corruption. The government must look into its own oil bill and cut the allocations to ministers and government agencies. This it can do by limiting the financial allocation and implementing conservation policies like that of car pooling. Just imagine the saving of petrol if three ministers travel in those large bullet proof cars and only six petrol guzzling security vehicles accompany them instead of 18! (6 per each minister otherwise).

Let’s face the problem. The difficulties in importing the country’s fuel requirements have arisen owing to the overall economic and financial situation, especially the massive war expenditure. The war expenditure itself has a high fuel cost. A sizeable proportion of petrol consumption is in the public sector and if a serious attempt is to be made in conserving fuel, it must come from its own curtailment of consumption. The government is itself a serious offender in the consumption of petrol.

Many of the needs of petroleum are essential, like in case of public transport and thermal power generation that does not lend to reduction in demand. These vital considerations must be taken into account in devising a programme of fuel conservation. Rationing is likely to lead to bureaucratic inefficiencies, high administrative costs and corruption rather than conservation of a significant amount of fuel.