Fuel prices remain high

Kudzanai Gerede
As other economies reap the benefits of receding crude oil prices on the international market, Zimbabwe’s fuel dealers once again deprive the economy of this positive global phenomenon by dragging in synchronising the price structures with those recorded internationally, a case that has serious ramifications on the country’s economic competitiveness.

Energy costs make up 30-40 percent of operating costs in Zimbabwe and the acute fall of oil prices in recent years is expected to reduce the cost of doing business and friendly consumer prices.

The country has, however, witnessed a marginal decline since last year despite the fact that the country blends unleaded petrol with ethanol, an exercise which is supposed to make local fuel even cheaper.

Prices of crude oil on the international market have plummeted from highs of US$115 per barrel about two years ago to a 11-year low of around $27-$30 per barrel in January 2016.

The acute drop in oil prices has been attributed to the flooding of the commodity on the market. This has been caused by the United States of America’s oil supplies from its huge reserves as part of its cost cutting strategies, thereby flooding the market. The US has been the world’s biggest consumer and buyer of oil over the years and its decision to stop importing has left a huge void for crude oil uptake. This has been worsened by Chinese industrial decline, which has seen volumes of its uptake tumbling due to low demand. Iran on the other end announced sooner-than anticipated resumption of exports which has rendered the market in excess of oil commodity supply.

With the global outlook not promising an increase in appetite for crude oil in 2016, it seems oil prices will remain low with even higher chances of crumbling further. There is need for the country to seriously consider synchronising its fuel price structures with the international trends. However, fuel suppliers are arguing that the lead time between processing crude oil and importation into the country result the slow reflection of the actual price fall on the international market but surprisingly when fuel prices go up, it need not to wait for that fuel they would have paid for in advance at a cheaper price to run out before they quickly react to hiking prices.

Last week, the Zimbabwe Energy Regulatory Authority (ZERA) chief executive office Engineer Gloria Magombo told The Manica Post Business that the regulatory authority was monitoring international price movements and ensuring compliance of local dealers and highlighted other costs which make up the final consumer price. She said fuel prices in the country were expected to fall within a few days in line with global events.

“The decline in prices of crude oil does not translate to the same percentage reduction in the FOB as there are processing costs. Freight and other charges have to be paid. The regulatory cap prices of blend will fall from the current levels by 1c/litre to $1,27 whilst diesel will fall by 2c/litre during the week starting February 1, 2016.

“Thereafter both diesel and blend will fall by a further 2c/litre to levels of $1,03/litre and $1,25/litre respectively starting on February 8 2016,” said Engineer Magombo.

Although fuel prices have slightly fallen since Monday across the country, with dealers like Harare Redan selling diesel at 98 cents per litre, consumers are questioning why the cost still remains high in comparison with our regional counterparts.

According to the Transport Forex, a South African agency monitoring trends in fuel prices for regional transporters’ convenience, Zimbabwe’s fuel despite a reduction on Monday remains the most expensive in the southern region. Diesel prices in South Africa is at an average of $0,70 per litre, Zambia is averaged at $0,80 with Botswana and Tanzania averaged at $0,68 and $0,90 respectively against Zimbabwe’s average of $1,05.

“The problem in the country has been the propensity for profiteering, a hangover of the 2007 economic meltdown without considering business sense. There should be genuine business intentions with regards to fuel suppliers as the current mark-up they impose against falling international prices suggests otherwise,” National Economic Consultative Forum economist Mr Pepukai Chivore noted.

He said the country was not conforming to international fuel variables because the energy sector is deregulated, with Government directing fuel reduction only when prices become extreme.

He also said the tax system on fuel used by Government makes it even hard to reflect marginal price variables occurring internationally.

“There is need to move away from the specific tax system currently imposed by Government and go for the Ad valorem (according to value) tax system.

“The Ad valorem tax system responds to changes in international prices unlike the specific tax system which is consuming about 45 cents per litre for petrol and 40 cents per litre for diesel, so adopting the Ad valorem system will help fuel sector to adjust easily to variables in prices on the international market,” added Chivore.

Ad valorem tax is any tax imposed on the basis of the monetary value of the taxed item. Traditionally, most customs and excises had “specific” rates; the tax base was defined in terms of physical units such as gallons, pounds or barrels.

Analysts have often lamented the multiplicity of current tax structures set up by Government which were leading to the increase on the cost of fuel in the local market.

Last year, soon after a sharp drop in oil prices on the international arena, Government quickly increased excess duty on imported fuel by about 28-33 percent.

Despite the regulatory authority monitoring compliance to international variables on the local market, the stringent tax systems on imported fuel are derailing any hopes of achieving low prices such as those prevailing across the country’s borders.

In Zimbabwe, Government levies and taxes (duty included) amount to 46 cents per litre for diesel and 63 cents per litre for petrol. The other levies/taxes on fuel are Carbon Tax, Debt Redemption Levy and Strategic Reserve Levy, which are fixed costs therefore not affected by changes in international oil prices movement.

Last year, the National Economic Consultative Forum (NECF) held a Fuel Prices Dialogue with industry stakeholders and the Ministry of Energy and Power Development and its parastatal Zimbabwe Energy Regulatory Authority (ZERA) and came up with recommendations which all parties endorsed.

Amongst major highlights were that ZERA should regularly hold public awareness campaigns on fuel pricing model and gazette maximum prices through media. Blending effect on fuel price should be significant to compensate for mileage reduction per litre of petrol and ensure that fuel pricing model was quick to respond to movements in crude oil among other recommendations.