The cost of fuel at the pump is of interest to every Ghanaian because of its direct impact on our daily lives. Whether you drive a personal car or use public transport, the changes in the prices of fuel affects your cost of living. Fuel is a key ingredient required to power the economy, and therefore its level of consumption has a direct relationship with how strong an economy is; a rise in the consumption of petroleum products is usually an indication of a growing economy. The United States of America (U.S.A) consumes the most oil in the world and is the world’s biggest economy, followed by China which is the world’s second largest oil consumer and therefore the second largest economy in the world. Therefore, a product of this nature which has such a direct impact on every citizen’s life, and has no easily available alternatives will always be of utmost importance to consumers, and hence the need to know what goes into how much we pay for it and what drives the changes in its price.
Who determines the Price of Fuel in Ghana?
The price of fuel in Ghana is determined by a formula that takes into consideration the following factors:
- The world market price of each petroleum product;
- The cost of importing or producing the product and making it available for loading to retail outlets at the storage depot (referred to as the Suppliers’ Premium);
- The Ghana Cedi (GHS) to US Dollar (USD) exchange rate;
- The taxes/levies on each petroleum product; and
- The distribution margins on each product.
The National Petroleum Authority (NPA) regulates the petroleum downstream industry in Ghana. One of its core mandates is to ensure that the pricing of petroleum products is done in conformity with the prescribed petroleum pricing formula which is made up of the components listed above. Until July 2015, the pricing of all petroleum product was regulated by the NPA. Therefore, before the start of every pricing window on the 1st or 16th of each month, the NPA will compute and announce the prices at which each petroleum product should be sold. This allowed government to control prices and subsidized the prices for consumers when it deemed it fit to do so. However, due to the challenges that price control brought on the economy and the threat it posed to the continuous availability of petroleum products, the pricing of petroleum products in Ghana was deregulated in July 2015. Price deregulation allowed market forces to determine the prices of petroleum products without the direct control of government. This resulted in the removal of subsidies on petroleum products, and the prices change in response to price changes on the international market and the strength of the GHS against the USD.
The pricing of Premix Fuel and Residual Fuel Oil (RFO) have not been deregulated. The NPA is still responsible for the computation and announcement of the prices of these two products which are highly subsidised by government. Premix Fuel is the fuel used by fisher folk in their outboard motors while RFO is used by local manufacturing companies in production of goods. Government made a policy to continue to support these two critical sectors of the economy, particularly because the end-users can easily be targeted. The pricing of Aviation Turbine Kerosene (use by aeroplanes), the gasoil used the mining sector, oil rigs and international marine vessels that bunker in Ghana are also regulated by the NPA.
Even though pricing of petroleum products is deregulated, the NPA plays a supervisory role by ensuring that the Bulk Import Distribution and Export Companies (BIDECs) and Oil Marketing Companies (OMCs)/Liquefied Petroleum Gas Marketing Companies (LPGMCs) who are now responsible for pricing the other products such as petrol, diesel, and LPG do so in conformity with the prescribed petroleum pricing formula. The NPA also conducts regular price monitoring exercises and analyses the prices determined by the BIDECs and OMCs/LPGMCs on a regular basis to ensure that the interests of both consumers and Petroleum Service Providers are protected, with regards to pricing, as required by Section 2e on the NPA Act.
Components of the Ex-Pump Price of Fuel
The price at which a consumer buys fuel at the retail outlet or filling station is called the ex-pump price. The ex-pump price is arrived at by adding the ex-refinery price of the product to the taxes, levies and margins imposed of the product.
The ex-refinery price is the price at which the importers (Bulk Import, Distribution and Export Companies) sell the product to Oil Marketing Companies (OMCs) and LPG Marketing Companies (LPGMCs). It is made up of the world market price of the product and the cost of landing the product into Ghana or producing the product locally before it is sold to the OMCs/LPGMCs for supply to their retail outlets.
The Ghana Cedi to US Dollar (GHS/USD) exchange rate is used to convert the ex-refinery price from USD to GHS before sale to the OMC/LPGMS.
Currently, the ex-refinery price represents about 75% and 81% of the ex-pump price of petrol and diesel respectively. The taxes and levies represent about 17% and 14% respectively, while the various margins together represent about 8% and 6% of the pump prices of petrol and diesel respectively.
Why does the price of fuel change frequently?
In Ghana, there are two pricing windows in a month (1st – 15th and 16th to end of month) within which both the BIDECs and OMCs/LPGMCs generally review the prices of petroleum products. The prices of petroleum products on the world market and the exchange rate change daily, however, because of the bi-weekly pricing window policy practiced in Ghana, the daily prices on the world market are averaged for a two-week period and used in the pricing formula.
The world market prices and the exchange rates used in the pricing formula to determine ex-pump prices in Ghana vary for every pricing window due to the daily changes mentioned above. In view of this, the ex-pump prices in Ghana change in response to the level of changes in these components of the pricing formula. Thus, when prices on the world market rise, it leads in increases in ex-pump prices in Ghana and vice versa. The depreciation of the Ghana Cedi (GHS) against the US Dollar (USD) also results in increases in ex-pump prices.
Prior to the implementation of the Price Deregulation in July 2015, when the pricing of petroleum products was controlled, government often intervened in the pricing of petroleum products by subsidising, and thereby preventing the passing on of the full price changes, particularly price increments, to consumers. As a result of these interventions by governments, ex-pump prices used to remain unchanged over longer periods, while the level of subsidies kept accumulating. This sometimes created the impression that fuel prices were stable during those periods, when it was rather the interventions by government that were preventing the changes from being seen at the pump.
However, after the implementation of the price deregulation policy which removed government’s direct intervention in the pricing of petroleum products, in the form of subsidising, ex-pump prices have been changing frequently (i.e. almost every pricing window) in response to the changes in the world market prices and the exchange rates.
Why Price Deregulation? How has it benefited the country?
Regulation of prices allowed governments to intervene in the pricing of petroleum products by preventing the BIDECs and OMCs/LPGMCs from passing on price increases to consumers at the pumps. To ensure that these companies were able to recover their cost of investment to be able to pay their suppliers and continue supplying products regularly to consumers, government was required to reimburse them.
However, because governments did not make budgetary provision for subsidies, these payments were mostly delayed and resulted in liquidity challenges for oil importers (BIDECs) and thereby threatening their ability to supply products to meet demand. The removal of subsidies has addressed this threat and has allowed the suppliers of petroleum products to fully recover their investments which has led to the interrupted supply of petroleum products to Ghanaians. The growth of the economy relies on the availability of petroleum products and therefore this threat to supply had to be addressed. Also, the discomfort that accompanied shortages of petroleum products is highly undesirable and after several consultations, it was generally agreed that it was better for petroleum products to be available at the right price than to subsidise their prices and not have them available.
Another major challenge faced by the petroleum downstream industry when prices were regulated had to do with exchange rate losses. The NPA used to determine the exchange rates for the pricing of petroleum products. Due to the rapid depreciation of the Ghana Cedi against the US Dollar, the exchange rate used by the NPA was mostly below the rate at which the BIDECs eventually procured US Dollars to pay their suppliers. The BIDECs used to make claims for these exchange rate losses from government because they could not apply the actual exchange rates at which they procured US Dollars in pricing their products. This burden was taken off government because Price Deregulation allows the BIDECs to determine the exchange rates to use in pricing their products and therefore they are required to manage this risk by themselves.
The implementation of the Price Deregulation policy has introduced keen competition to the petroleum downstream industry which has benefited the consumer. Prior to the implementation of this policy and companies enjoyed the same suppliers’ premiums and margins, and ex-pump prices were the same at almost all retail outlets. However, due to the level of competition that has accompanied this policy there are variations in ex-pump prices which benefits the consumer. Most companies seek strategies that will enable them offer products to consumers at the least possible cost and price.
Bringing transparency to the pricing of petroleum products in Ghana has become necessary to ensure that consumers are well-informed and empowered to understand what goes into how much they pay for fuel. This article, and future ones like it, seeks to make a concept which for a long time has been considered very technical one that the layman can understand.
The writer is the Head of Pricing at National Petroleum Authority