News
Oil politics shatters CPC plans
Presidential polls have ruined the Government’s chances of keeping fuel prices at current, high levels aimed at wiping out losses at both the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) even though crude oil prices have fallen sharply overseas, local oil traders and economists said.
Just two days after Petroleum Industries Minister Anura Priyadarshana Yapa told reporters that current prices were due to heavy taxes, the Government on Friday in a pre-election incentive announced a reduction of Rs. 7 a litre for petrol and diesel and Rs. 5 a litre for kerosene.
World crude prices sank to between US$ 70 a barrel on Friday and are seen falling to $ 50 in the coming weeks. This is compared to $100 earlier this year and record highs of nearly $150 in July 2008, when the CPC lost badly in ill-advised hedging contracts, deals that were exclusively exposed by the Sunday Times. The CPC has suffered losses by subsidising local prices while 20 to 30 per cent of CEB power generation comes from costly oil-powered thermal power and selling to consumers at a huge loss owing to subsidised prices.
Economists allege that despite sharp falls in global crude prices the CPC has only reduced prices once — in September — though there is more flexibility to do so.
“The plan was to keep prices at current levels for about six months during which the enormous gains would be used to wipe out mammoth losses at the CPC and the CEB,” one economist said, adding: “The election, however, has forced the Government to think otherwise.”Rising local fuel prices have been condemned by the JHU and other opposition parties which say the prices can be reduced a lot in line with world oil prices.
With crude falling to $70 a barrel, local oil traders say the CPC should be importing fuel at prices that are 25 per cent lower but the new, controversial term contracts means gains are unlikely. Recently the CPC switched to one-year term contracts from the tender process, which traders allege means the corporation is buying fuel at higher prices since price predictions (hedging) is a risky business unless done properly (the CPC hedging fiasco).
“In many cases we are buying fuel at fixed prices on long term contracts and by the time the contract ends, the price is higher than the world market,” one trader said, adding that the tender process gave the CPC flexibility to choose the best price.While worldwide, prices are falling and continuing to do so, OPEC dominated by Saudi Arabia has not reduced production as it normally does whenever prices fall.
Foreign oil experts say that global supply and demand has changed sharply in recent times after the United States increased its own production and access to new oil inventories through new exploration techniques of ‘fracking’ or horizontal drilling. This new technique (fracking) makes it possible to extract natural gas from places that were earlier unreachable.
Experts say that while the US has been reluctant to exhaust its natural reserves, saving it for any future oil crisis, the Obama administration has been forced by high OPEC crude costs to look for local supply options. This coupled with increased use of renewable energy including solar power across the world has led to supply outstripping demand.
The US is the world’s biggest oil consumer and experts say OPEC did not reduce its supply at the behest of Saudi Arabia, a US ally, despite falling prices. According to some estimates, the US – with its new found resources – is expected to be self-sufficient in 2016/17. This should then see another sharp fall in crude prices.