Oil conspiracy: How our governments have contributed to the rise of fuel prices

There is much anxiety with regard to fuel these days. Fuel prices have been increased several times during the past week. The Indian Oil Company (IOC) raised the price of diesel from Rs. 80 to Rs. 100 a litre on May 20. On May 24, the Ceylon Petroleum Corporation raised diesel prices by Rs. 30 a litre, kerosene by Rs. 10 and petrol by Rs. 30. Just after this the price of diesel was once again raised to Rs. 110 a litre by the IOC. Although the prices of diesel in both the IOC and CPC became equal this did not last long. Once again the IOC raised the price thus making it Rs. 130 a litre, from midnight on May 27. Accordingly the total increase of diesel price made by IOC was Rs. 50, i.e. by 62% within a one week.

Now the situation is such that we have to talk about fuel prices not only with respect to the IOC, but the CPC as well. But prior to the signing of the agreement with the IOC, the decision making power was solely with the CPC which had been incorporated by Act No. 28 of 1961. Before that, the import and distribution of petroleum products in Sri Lanka were in the hands of foreign firms such as Shell ESSO and Caltex.

Since 1962, the government entered the petroleum market through the CPC. After the establishment of the oil refinery complex at Sapugaskanda and the launching of an agro-chemical section, the activities of the CPC assumed wider proportions. Shipping-fuel and aviation-fuel sections were launched by the CPC in 1971. In spite of various political influences, corruption, waste etc. the CPC developed as a profit-making corporation.

Even during the 2001, UNP regime which tried its best to de-nationalize the CPC, the corporation continued to remain as a profit-making body. It paid the government Rs, 29,000 million as taxes while making a profit of Rs. 9,000 million.

But during the period of the UNP rule, the government decided to distribute CPC sales outlets among three parties. Accordingly 100 outlets at busy locations were assigned to the IOC. Another 107 outlets were given to the treasury for the purpose of selling them. Some 148 sales outlets were to remain with the CPC. The outlets given to the Treasury could not be sold due to protests launched by CPC employees.

In addition to that, a company called Ceylon Petroleum Storage Terminal (CPSIL) was set up by joining the wholesale stores of the corporation, the network of oil pipelines and the two refineries. The ownership of the company was divided into three. One third of it is owned by the IOC, one third by the treasury and the rest by the CPC.

The move was clearly aimed at destroying the more than 40-year-old corporation. The catastrophe we are faced with today in the form of fuel price hikes is part of the same old conspiracy. The government justifies the fuel price, pointing its finger at the world market. It is true that the fuel prices have shot up to $130 in the world market. In the past, too, world market prices have gone up, but the local prices did not go up by such a huge amount.

The difference is clear. The CPC then had additional incomes. It earned its income not merely by selling fuel in the local market. It made huge profits by selling fuel and lubricants to ships and aircraft. Sri Lanka is situated on a sea route, and about 200 ships sail past Sri Lanka every day.

The situation today is different. The supply of fuel and lubricants to ships is handled by private firms. The COPE report said the deal of selling the right of supplying fuel to the private firm concerned reeked of corruption.

If this business is handled by the CPC, it could earn Rs. 500 million a day by selling fuel to at least 50 ships. In that case, however much the world prices increase, the CPC will be able to sell fuel at a lesser rate to the people by taking advantage of the profits earned through selling oil to ships and aircraft.

In addition to that, the Sapuganskanda Oil Refinery also earned extra income, by producing urea out of naphtha, a by-product of the refinery. Today all those additional production lines have been ruined. Although naphtha is produced as a by-product even today, it is allowed to go waste. We spent about Rs. 13,000 million a year on the import of fertilizers. Earlier the poisonous gases emitted from the refinery were used to produce agro-chemicals. The C-Petco which produced those agro-chemicals has been sold now. However, by developing the Sapugaskanda Oil Refinery we will be able to earn a significant income.

In the 1930s, Sri Lanka recovered half of the money spent on importing crude oil by selling refined oil abroad. But today the refineries are receiving stepmotherly treatment. They have not been modernized or renovated since 1971.

The promise given in the Mahinda Chinthanaya that an oil refinery would be set up in Hambantota has become an empty promise. There are reports that a private firm is going to handle the job. Although the president of Iran who recently visited the country ceremoniously opened the plaque for establishing an oil refinery even the feasibility report of the project is yet to be carried out.

After loosing all those additional modes of income, the CPC has made itself a puppet dancing to the tune of the world market. Selling diesel is not profitable. There’s a loss of about Rs. 7 a litre. But selling petrol is profitable. With the new increase, there’s a profit of Rs. 37 a litre of petrol. Apart from that, the government levies a tax of about of Rs. 28 a litre. Although the price of petrol today is Rs. 157 a litre, the government tax and the profit amounts to Rs. 62. The argument put forward by the government now is that the loss incurred by selling diesel is recovered by selling petrol at a profit. Generally, the diesel consumption is about five times the petrol consumption in Sri Lanka. That is to say that the strategy of the government seems to be the recovery of the loss of selling 5 litres of diesel by selling one liter of petrol.

But this formula of recovering the loss could only be adopted in a situation where these two types of fuel are sold solely by the corporation. Now the IOC too has come into the picture. Its diesel price is higher than that of the CPC. It appears that the IOC has a strategy. Obviously, the consumers will go to CPC outlets, as the price there is lower. By selling more diesel, the loss for the government would be more. But the CPC would not be able to fully recover the loss by adopting the formula discussed above. That is because the consumers will also go to IOC outlets to buy petrol. The CPC will continue to lose while IOC will make huge profits. At the end of the day, it is our national wealth that is flowing abroad.

Thought IOC manages 100 outlets, it accounts for 30% of the total consumption of oil in Sri Lanka. Besides, the IOC also seeks to gain ownership of a several outlets which the Treasury is planning to sell.

However in the case of a reduction of the sale of fuel by the CPC, to a point less than 55% a serious problem would emerge as a result. About 30 million barrels of crude oil are imported and refined annually. This amounted to 55% of Sri Lanka’s requirement. The balance 45% comes as refined oil. According to the agreement signed with the IOC, the company has the independence to raise prices. The IOC will also be able to import oil after this year if it accounts for the distribution of more than 95% of Sri Lanka’s oil consumption. This means there could arise a situation where even the oil refined here could not be sold. Whatever independence we have now with regard to oil will be lost. We, therefore, hold all the governments that (partitioned) and sold the CPC, assigned the distribution of oil to an Indian company, privatized the supplies such as marine oil, aero-oil and destroyed the additional sources of income, responsible for the current crisis and the future calamity.

It is a matter to be laughed at when the UNP which was also responsible for the sorry state of affairs at the CPC launched a bullock carts protest over the oil price hikes. On the other hand, the government which removed the subsidies on fuel and deprived the CPC of the additional incomes it earned should also be held responsible for this situation.

Fuel is one of the prime most factors in an economy. Oil is connected with all stages in the economic process of production, distribution and consumption. Along with the increase of the fuel prices, the prices of all other goods and services including the transport charges go up. The result would be uncontrollable increase in inflation. Therefore the government should have a programme of controlling the price of fule. Even though the prices in the world market moved up it should be cushioned by creating additional income sources.

Fuel subsidies should be granted to the vital sections of the economy and the poorest people of the country. But the government has not allocated funds for the fuel subsidy since 2006. Instead of leaving a larger tax on petrol and diesel, the government has dragged the people into a big mess (from the frying pan to the hearth). The “petroleum crisis” provides the best examples to show how the governments gradually ruined our country and made us dependent on foreigners and foreign companies. The solutions to this crisis could be found by directing the economy towards a new direction. A new exemplary leadership has to be found. This gigantic crisis could not be solved by rotating in the same place of the oil mill as we have done for about sixty years now, or by face changing politics. Today the country needs a different leadership.