It was speculated that government was once more going to increase taxes on petroleum products during the 2019 mid-year budget review, contrary to the expectation of Ghanaians. The Minority Caucus in Parliament joined sections of Ghanaians to launch a protest, a situation that often comes up when politicians want to score political points against their opponents, using fuel prices as basis.
Leading up to the 2016 Parliamentary and Presidential election in Ghana, fuel prices became a topical issue in the country. It gained traction when the former Finance Minister Mr. Seth Terkper presented the 2015 budget to Parliament, and revealed a special petroleum tax (SPT) of 17.5 percent in the 2015 fiscal year.
At the time, Mr. Terkper argued that the introduction of the tax was necessary to shore up government revenue as Crude oil prices had tumbled below US$30 per barrel as against government projected price per barrel. The Deputy Finance Minister Mr. Cassiel Ato Forson echoed same and refuted reports that the SPT would have a major impact on the prices of petroleum products in the country.
The explanation offered by the past government through its functionaries was taken with a pinch of salt by their opponents who are now in the driving seat. They described the SPT as nuisance tax, and labeled the past government as insensitive to the plight of Ghanaians. Out of this, the then-candidate Nana Addo Dankwa Akufu-Addo campaigned and promised Ghanaians that he would scrap the SPT and reduce fuel prices for Ghanaians when voted into office.
Today fuel prices are at unprecedented levels, the special petroleum tax is yet to be scrapped, and fuel prices are set to go up further. It leaves one wondering why politicians will ever use fuel price as tool to make any political gain and yet fail to make do their promises to the electorate when giving the opportunity.
Determining Fuel Prices
Just like any other commodity such as wheat, gold, salt, coffee, and cocoa, the price of crude oil is determined by supply and demand which are largely influenced by speculators, politicians, commodity traders and cartels alike.
High fuel prices are basically the creation of high crude oil prices on the international markets, as for example, crude oil costs account for roughly 54 percent of the price of regular Gasoline. The remaining 46 percent is attributed to the refining, distribution and marketing, and taxes on the products, which are more stable. And so when the price of crude oil rise, one can expect prices of the refined products to rise on the global market in due course.
All countries have access to the same fuel prices of international markets based on benchmarks set by entities like Standard and Poor’s (S&P) Platt’s and Argus. Supply and demand, commodities traders, and the value of the dollar may influence the average price of the fuels on the global market. However, the differences in prices on the local market across countries are due to the various taxes and subsidies imposed on these fuels by respective governments.
One key variable that also impact on how much consumers would have to pay, is the value of the local currency against the Dollar; the major trading currency for crude oil and fuels. The depreciation of local currency against major trading currencies adds an extra cost to fuels, because the importers of both crude and finished products (fuels) would require extra units of the local currency to purchase same quantity in the future as a result of the forex exposure.
An Essential Good
The significance of fuels like Gasoline (Petrol), Gasoil (Diesel), Kerosene, and liquefied petroleum gas (LPG) to human society cannot be overstressed. These fuels are used to power vehicles, ships, trains, and airplanes as well as generating heating systems and electricity for homes and industries.
Taking into consideration the noticeable contributions of fuels to modern human society, the economic implications of high prices have pose a dilemma to governments across the globe. This is because rising fuel prices negatively affect the disposable income of consumers and households, leaving them less to spend on other goods and services. Same goes for businesses as production is made more expensive in the process.
Ordinarily, a government would wish to apply subsidies on fuels like Gasoline and Gasoil to score political points, as it reduces the price of these commodities. However, the imposition of taxes is the preferred choice among the two measures because of the essential nature of the commodity.
For instance, if the price of ice cream is increased by 30 percent, it is likely you would stop buying ice cream because it’s not a necessity, but more of a luxury. However, if the price of Gasoline at the pump is increased by same margin, you would still buy. Although you may not be happy about the price increase, but you would still fill up your tank. Why? Because Gasoline is an essential good, necessary for your daily routine. Fuels are so essential to our very existence that changes in their prices tend to have a limited effect on how much we consume. This is the very reason for which politicians would keep imposing taxes on fuels to raise revenue, even if they promised the opposite.
Rising Fuel Prices
Over the past two and half years, rising oil prices have bitten hard on both the local and global economy. Prices of crude oil, Gasoline, and Gasoil on the world market have risen by roughly 22 percent, 15 percent, and 20 percent respectively over the period.
In economies like Ghana and India where the fuel markets are deregulated, consumers have had to pay for the full cost of fuel consumed as dictated by key variables like the average world oil price, supplier’s premium, freight and insurance premium, and the foreign exchange exposure and taxes/levies.
Between January 2017 and now (July 2019), the price of both local Gasoline and Gasoil have risen by roughly 38 percent, with both products crossing the Gh5.2 per liter mark. A gallon of Gasoline which used to be sold at Ghs17 on average terms in January 2017 is now going for Ghs23.35; in sharp contrast with the promise given by the then candidate Nana Akufu-Addo during the 2016 campaign.
The situation has been largely influenced by the fast depreciation of the Ghana Cedi against the US Dollar. The Dollar which used to be sold at roughly Gh4.3 in January 2017 is now traded at Ghs5.4 plus, compelling importers and marketers of the refined products to pass on to consumers all the costs associated with bringing the products to the pump, including the foreign exchange exposure to consumers.
Under the current price deregulation regime which ensures full cost recoveries, fuel prices are largely determined by market forces and not the government. And that if for anything the government would want to influence fuel market prices, then it may turn its attention to the taxes and levies on the fuel Price Build-up, and also seek to strengthen the local currency against major trading currencies.
Ending the Politics
With successive governments having failed to deliver their promises of reducing fuel prices when elected into office, the call is that “politicians must cease campaigning and scoring cheap political points with fuel prices.”
The Industrial and Commercial Union (ICU) are among the various groups that have sent out a clear and strong signal to politicians that it will no longer countenance their false promises to reduce fuel prices if voted into office. They claim both past and present governments have failed to live up to that promise whenever they assume the reins of power, and so they have resolved to reject any such promise in the future.
The ICU has indicated that they will make it a policy for their members to throw out any politician with that promise to reduce petroleum product prices, going into the 2020 elections; having realized that the determination of the prices of the products is not within the mandate of any administration.
The Chamber for Petroleum Consumers (COPEC) is another body that has impressed on the government on numerous occasions (including staging a demonstration in February 2018) to scrap the special petroleum tax and reduce fuel prices in line with its promises prior to the 2016 election.
A former Chief Executive Officer (CEO) of the Volta River Authority (VRA), Dr. Charles Wereko Brobby have equally called on the government to scrap the special petroleum tax in order to relieve consumers of the burden of escalating petroleum prices.
All these calls resonate among many Ghanaians that it is time for politicians to cease meddling with the fuel market through subsidies and unwarranted promises. Even the current application of the price stabilization and recovery levy (PSRL) by the National Petroleum Authority (NPA) and the Ministry of Finance (MoF) is being described as detrimental to the operations and financial positions of the oil marketing companies (OMCs), and so the application must stop to allow the market to regulate itself.
Written by Paa Kwasi Anamua Sakyi, Institute for Energy Security (IES) ©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.
