Rising global crude oil prices over the past few months will increase Sri Lanka’s oil import bill in addition to driving up prices of other imports such as fertilizer and chemicals.
Global crude prices reached $83.25 on Thursday this week, dropping slightly from US$85 to US$87 per barrel range a last week but almost doubling from a year ago when the price per barrel in April 2009 was $44.
A leading economist told the Business Times that depending on the extent to which the government will subsidize local petroleum products, the rising prices will increase the budget deficit.
Director of the CB’s Economics Research Department K.D. Ranasinghe told the Business Times the CB projected at the beginning of the year that the average oil price would be around US$82.50. “It remains at that. During the last three months, oil prices were below US$80,” he said. “Sometimes, prices declined to US$70. So far, the average is below our targeted level.”
Mr. Ranasinghe explained that US$82.50 per barrel is the Ceylon Petroleum Corporation (CPC) import price. The CPC imports crude oil mainly from Iran so their prices remain a few dollars below the Brent crude price of US$83.25.
“Therefore, we think our projections will hold for some time although it is very hard to predict in what direction international prices will move.” If the global economy recovers faster than expected, Mr. Ranasinghe said oil prices will move upward. He added that according to international projections, several experts feel the average price of crude will be around US$80 per barrel. The CB agrees although Mr. Ranasinghe said there will be some periodic spikes.
If oil prices were to increase significantly, Mr. Ranasinghe said there should be some adjustment in local prices. However at present, with the exception of kerosene, the CB does not feel that any major adjustments are needed. He also said there could be a secondary impact if oil prices were to increase in terms of higher fertilizer and commodity costs. However, that would depend on how much of a pass through effect there will be on consumers.
According to the External Sector Performance for January 2010 released by the Central Bank (CB) in the beginning of the month, expenditure on imports increased substantially by 70.1% to US$1.16 billion due to increased expenditure on all major categories, particularly intermediate goods led by petroleum imports.
The economist said the only favorable development is that rubber prices will also increase. However, the local rubber market does not have much of an exportable supply so significant gains may not be realized.
He added that inflation will rise as the increase in oil prices are passed onto consumers. If petroleum product prices are increased in Sri Lanka, it would result in substantial increases in transport, electricity and energy costs.