Sri Lanka`s politicians play petroleum politics
Dec 05, 2008 (LBO) - Despite printing money to subsidize oil and driving inflation sky high, speculating in oil derivatives to keep prices down and getting the entire nation into trouble, Sri Lanka`s politics of petroleum deception is still riding high.
In response to an opposition claim that petrol could be sold at 72 rupee a litre, a government minister says diesel is sold at a `loss` and people should remember the time when the `government` bore the `burden.`

`I am also asking people to talk about the time when the government bore the burden,` mass media minister Lakshman Yapa Abeywardane told reporters.

`Especially by July 2008, when oil prices went up to 147 dollar a barrel, a litre of petrol went up to 216 rupees in the international market.`

Whose Burden?

Sri Lanka`s politicians routinely deceive the people about the `government bearing the burden.`

People do not know that the `government` runs with peoples` taxes, borrowed money (which increases the national debt) or printed money, which push inflation to very high levels.

In early 2004 when an automatic price-formula was abandoned inflation was near zero, but by the end of the year it was zooming towards 20 percent. In 2006, 2007 and 2008 inflation was near or above 20 percent.

All government expenses, including the salaries and luxury tax-free cars of 100 plus ministers are a burden borne by the people.

When inflation is high the `burden` of government is borne more by the poor and old people with financial savings, because rich people have real assets such as land that protects them with rising prices.

Where in the World?

`At 216 rupees a litre, a gallon of petrol is 928 rupees,` minister Abeywardane said.

`If prices were changed on a floating formula a gallon of petrol would have cost 928 rupees.`

Minister Abeywardane did not tell reporters where he came up with the 216 rupees a litre or 928 rupees a litre international price figure.

Even in the United States, petrol prices hit only about four dollars a gallon which was less than 500 rupees, and lower than the Sri Lanka price of 157 rupees a litre at its peak.

Ordinary people are in the dark about political statistics. Dollar prices and pump prices are difficult for people to relate to. Political claims go unchallenged.

At 147 dollars a barrel, a litre of crude works out to only 99.25 rupees with the rupee at 108 rupees. A barrel is made up of approximately 160 litres.

The 147 figure was a peak price for a small amount of benchmark crude, and a bulk of petroleum traded at far lower prices. Sri Lanka imports Iranian light, which is cheaper than the New York light sweet benchmark.

Refined products, such as petrol and diesel, trade about 10 to 20 dollars above the crude prices with the so-called `crack margin` varying from summer to winter, depending on demand and refinery capacity in the world.

Price Reality

According to Reuters data, the Singapore Platts price - on which Sri Lanka`s petroleum price formula is based - was between 133.45 and 148.26 dollars a barrel in July 2008.

Even if Sri Lanka bought petrol at 148.26 (Sri Lanka`s Ceylon Petroleum imports refined petrol at a monthly average and refines the rest from crude) a litre of petrol only works out to 100.07 rupees.

Sri Lanka was selling petrol at 157 rupees a litre. In the US, gallon of petrol only peaked at about four US dollars or less than 440 rupees.

Freight and insurance is only about 2 rupees a litre. The difference between Sri Lanka`s retail prices is caused mainly by state taxes, and profits. CPC also has high operating costs, as it is overstaffed, compared to Lanka IOC, the second retailer.

In July 2008, the Platts refined diesel price fluctuated between 151.8 dollars and 182.7 dollars based on Reuters data, which works out to between 102 and 123 rupees.

But no evidence was presented by the minister to show that diesel was in fact imported at 182.7 dollars, which was a peak price. In any case, Sri Lanka imports on a monthly average.

Diesel was retailed at 110 rupees until the price was cut in the recent budget to 80 rupees.

More Claims

`Even today kerosene is sold at a loss,` says minister Abeywardane. `Today diesel is sold at a loss. Profits are only earned with petrol.`

According to Central Bank data refined petrol was 37.80 dollars a barrel, diesel 57.75 and kerosene 59.85 dollars a barrel.

This means the cost of wholesale petrol in Singapore is now 25.90 rupees (with the US dollar at 110 rupees), diesel 39.70 and kerosene 41.14 rupees a litres. At 80 rupees a litre, diesel is sold at close to double its original import cost.

Under a price formula released by the CPC in July 2007 (read link), which operated for only two months, diesel could be sold after charging a whole series of taxes at only 74 rupees a litre even if the Singapore price was 85 dollars a barrel.

Now it is less than half that price.

The July 2007 price formula was devised by then CPC chairman Ashantha de Mel, to maintain the CPC`s proftis, give tax revenue to the government and protect the country by passing through international prices quickly to maintain macro-economic equilibrium.

But the formula was shot down by a political `cost of living committee`. Instead, the country went for hedging through derivatives.

Free Lunch

Predictably, with its penchant for getting `free lunches` Sri Lanka`s government chose not to pay cash and opted to use `zero-cost` speculative instruments.

Instead of paying a price and eliminating or `hedging` a risk, Sri Lanka took on a greater risk to eliminate another risk. Now that risk has backfired and de Mel has lost his job and the job of the petroleum minister is on the line.

Marked-to-market losses in exotic derivatives sold to CPC is now estimated to be over 400 million dollars, which will probably make for the biggest corporate loss in the country`s history.

Court has suspended payments to banks.