The Recent Fuel Prices Hike And Its Impact On Consumers

Two days ago at the Starbite Shell fuel station in Tema Community 8, I parked my car at one of the filling points to purchase Gasoil (Diesel). I had asked the Attendant at the pump to fill the tank to the tune of Two Hundred Ghana Cedis (Gh¢200), and I was hoping to see the 38.5 liters I have become used to over the past five weeks displayed on the screen to satisfy my vigilance.

Gh¢200 was displayed alright after he had switched off the pump, but there was no way I could accept the corresponding value in liters of 37.14, this time around. Before I could proceed further with my disagreement, the Attendant pointed at the new price boldly displayed on the Price-board.

As a matter of fact I was really surprised at the change in price, especially when few days earlier the Institute for Energy Security (IES) had projected both Gasoil and Gasoline (Petrol) prices to remain unchanged over the first two weeks of the month of September 2019. The reason, as the Supervisor of the station would have me understand was that some component of the fuel Price Build-up (PBU) had changed.

Of course few calls I made confirmed that some components in the PBU had changed since Friday 30th August 2018. It follows the announcement of an upward adjustment in the Road Fund Levy (RFL), the Energy Debt Recovery Levy (EDRL) and the Price Stabilization and Recovery Levy (PSRL) by the Finance Minister Mr. Ken Ofori Atta, when he presented the 2019 mid-year budget review speech on Monday, 29 July 2019. The proposal by government was to increase the Energy Sector Levies by GHp20 per liter for petrol and diesel and GHp8 per kg for liquefied petroleum gas (LPG), to raise more revenue to enable Government issue additional bonds to pay down the energy sector debt obligations. 

And so based on the previous indicative prices for Gasoil and Gasoline the tax reviews translates to Ghp90 per gallon increment, thus moving the average price of both products from Gh¢23.33 per gallon to approximately Gh¢24.23 per gallon; representing an approximate 3.7 percent increment. The current increases comes to compound 32 months of torrid moments Ghanaians had to bear, as they had to contend with persistent increases in fuel prices since January 2017. And not even the revision and the neutralization of the PSRL aimed at reducing the impact of rising oil prices on the international market on consumers, and the downward review of the Special Petroleum Tax (SPT), could stop Gasoil and Gasoline prices from jumping by close to 50 percent to sell at Ghs5.385 per liter today.

Coming Days

The coming days may see interesting discussions and arguments, as well as resistance to the fuel price hikes, from civil society organizations (CSOs), politicians, energy Think-tanks, transport Unions, Labour Organizations, Drivers, and from almost every Ghanaian. In fact, the Chamber for Petroleum Consumers (COPEC) was the first to draw the dagger by a Press Release on 2nd September 2019, asking Government to reverse and withdraw the taxes increases with immediate effect.

Even before the increments take effect, various groups had expressed their displeasure and oppose the announcement of fuel price increases. COPEC earlier in July 2019 petitioned the Speaker of Parliament over the proposed increase in components of the Energy Sector Levies (ESLA) at the time, arguing that the fuel price increase is coming at the wrong time. COPEC had argued that “fuel price increase shall affect every aspect of the economy and could bring serious challenges to the standard of living of persons and their purchasing ability. The group indicated at the time that it will protest the increase in the ESLA levies if attempts at dialogue fail.

When the announcement was first made, Drivers across the various regions were among those who stated their displeasure. They were of the view that further increase in fuel prices will cripple their business. To them, an increase in fuel taxes will translate into in a hike in pump prices, which will have a cascading effect on the cost of transportation, goods and services, and the general cost of living in the country.

It therefore looks certain that with the tax increases effected and reflecting on fuel prices, all those who opposed the announcement in June 2019 will renew their protest on the impacts on citizens and the local economy.

More Revenue for Government

In his presentation of the 2019 mid-year budget review speech on Monday, 29th July 2019, the Finance Minister Mr. Ken Ofori Atta stated the objectives the Energy Sector Levies Act, 2015 (Act 899) which is restructured, rationalized and consolidated all the revenue legislation relating to the energy sector into one law. The object was to dedicate the levies to the energy sector and to promote prudent and efficient utilization of the revenue as well as facilitate sustainable long-term investments in the energy sector to enhance availability, regularity and reliability of supply. The dedication of these consolidated levies was to improve the poor balance sheets of the power sector utilities and relieve Government of the pressures of the sector in terms of reduced reliance on Ministry of Finance occasional direct funding.

According to him, the sector however continues to be exposed due to recurring debts and take or pay contracts. Stating that “at the inception of the Act, it was estimated that approximately twenty-four percent of the ex-pump price of fuel would adequately cover the required financing. This percentage has dwindled over the years and is currently about seventeen percent due to inflation and currency depreciation.” He therefore proceeded to propose an upward adjustment in the Road Fund Levy, the Energy Debt Recovery Levy; and the Price Stabilization and Recovery Levy to bring the ratios close to twenty-one percent to help bridge the financing requirements.

Although the persistent increases in fuel prices over the past two-and-a-half years reflects largely the strengthening international refined oil and crude oil prices, the depreciation of the local currency against the U.S. Dollar and tax reviews, made matters worse for consumers. It was made clear in the Finance Minister’s submissions in July 2019 that Ghanaians have to bear with additional fuel price increases because of inflation and further currency depreciation which largely falls under the control of government.

Section of Ghanaians are of the considered view that the revenue so much needed by Government can easily be realized from blocking the various revenue leaking ends, including the revenue lost to fuel smuggling, instead of burdening the ordinary Ghanaian with additional taxes and levies.

Impact of the Price Hikes

The price of fuel have been identified as a significant determinant of domestic and global economic performance. And the consequences of fuel price increases are grave, as it affects the different macro-economic variables such as production cost, inflation, interest rates, employments, and freights. Hikes in prices of petrol and diesel directly and indirectly affect all the major sectors of an economy like agriculture, transportation, manufacturing and production. This in turn affects the prices of daily essential commodities which are transported, including the cost of food. 

A direct consequence of rising fuel prices is increase in what motorists spend on fuels every month for the same distance travelled. Back-of-the-envelope estimations show that a person driving 1050km per month in Accra is likely to notice monthly fuel bills in January 2019 go up by approximately Gh¢122 for a Gasoline car, compared to January 2017 (based on 42 kilometer per gallon journey). Transport operators are the most exposed to fuel price increases as it remains a major input to their business. In such a case, individual transport operators who continue to set their own prices in the absence of a single transport economic regulator, are forced to pass on the added cost to commuters in the form of increased fares, most often in a confused manner.

Higher fuel prices pushes freight cost up and increases production costs for especially businesses that uses fuel as a major input (like power utilities, farmers, and processing plants), and who mostly pass on the added costs to the final consumer. It literally means that prices of essential commodities like fruits and vegetables, as well as other goods and services will increase. And rising production costs also bites hard on products and services demand, business profitability, wages, and employment et cetera. 

Also fuel price increases dents disposable incomes, by adding on to households budgets for not only fuels, but also transport fares and essential commodities and other goods/services like utilities and automobile. High fuel prices over a prolonged period may compel households to re-allocate resources by saving less or cutting down on expenses. 

And most importantly, if higher prices of goods and services last long, then it will have an inflationary effect. And the economic reaction to higher inflation may eventually result in increased interest rates. Higher interest rates and prolonged inflation may result in higher unemployment, higher utilities, currency depreciation, demand decline, tax revenue decline, and less real economic output; negatively affecting the overall economy.

Written by Paa Kwasi Anamua Sakyi, Institute for Energy Security ©2019 
The writer has over 22 years of experience in the technical and management areas of Oil and Gas Management, Banking and Finance, and Mechanical Engineering; working in both the Gold Mining and Oil sector. He is currently working as an Oil Trader, Consultant, and Policy Analyst in the global energy sector. He serves as a resource to many global energy research firms, including Argus Media.