The National Petroleum Authority which is the regulator of the downstream oil sector on Wednesday, August 11, 20201 organised a workshop for journalists to sensitize them about what goes into the pricing of petroleum products in the country.
Read full article The one-day event, held at the Conference Hall of the NPA, brought together media personnel who work across various mediums and platforms in the country.
The issue of petroleum prices, and the rate at which they have been increased, particularly this year, has been an issue of national discourse.
It is for this reason, and many others, that the NPA decided to have a workshop for reporters on the formula for calculating these prices.
In his opening remarks to welcome participants and guests at the workshop, the Chief Executive Officer of the NPA, Dr Mustapha Hamid said, “you are very important as far as nation-building is concerned and to flip it you are very influential in nation destruction. This is why media people must be knowledgeable people which is why they say the pen is mightier than the sword. So if we have a media that is uniformed and uneducated then it is very dangerous.
“This is why the NPA as part of its mandate to regulate the petroleum downstream sector decided to engage the media on petroleum pricing in the country”. He said since the country moved into full-blown deregulation it has stopped the attack on various governments as the principal agents who determine petroleum prices.
He adds that the price of petroleum is now determined by the forces of demand and supply as well as international geopolitics among others. He encouraged journalists not to make petroleum pricing an NDC or NPP matter because “petroleum pricing basically drives the economy, drives agriculture, drives the markets, productivity in workplaces and more. Everybody thrives on petroleum and so an educated journalism fraternity on petroleum pricing in a deregulated environment is very critical for the survival of our nation and the peace of our nation.”
The NPA boss promised to make the workshop a regular feature of their relationship with the media.
What goes into petroleum pricing
The prices of petroleum products on the world market are influenced basically by demand and supply fundamentals. Some factors that affect demand and supply are:
Geopolitics (especially in major oil-producing nations), demand from major oil consumers/economies such as the US and China, stock levels of petroleum products in the major world economies, new oil production technologies, strength of the US Dollar and weather among others.
Another component of the price build-up is taken up by taxes and levies. Taxes and levies are imposed on petroleum products by governments through parliamentary approval. Currently, there are levies and taxes such as the Energy Sector Recovery Levy, the sanitation and pollution levy, the Price Stabilisation and Recovery Lev, the Energy Fund Levy, the Road Fund Levy and Special Petroleum Tax.
Finally, there are the Margins, which are incorporated into the Ex-Pump Price Build-Up to cover various costs of distributing petroleum products. Some are statutory whilst others are not. Examples of the margins are, BOST Margin, Primary Distribution Margin, Fuel Marking Margin, Distribution Compensation Margin, Marketers Margin, Dealers/Retailers Margin, LPG Filling Plant/Premix/MGO-Local Admin Margin and many others.
In summary, the petrol price per litre breakdown is Ex-pump- 54%, Taxes-30% and Margins-16%. So 46% are taxes, margins and levies.
Deregulation in 2015 and its impact on the pricing formula
The Government of Ghana in June 2015 put in place a deregulation policy that had the expectation of allowing marketers and importers of petroleum products to set directly their own prices based on import parity costs, taxes and margins.
The policy had the primary objective of bringing an end to government subsidies on these products, which arises from exchange rate losses and consumer subsidies. Under the new system, the government will no longer set prices for consumer fuels every two weeks, instead leaving BDCs and OMCs to do so, albeit according to the existing formula that the NPA had used.
It was designed to allow downstream companies to be profitable and is based on global commodity prices and the value of the cedi.
The two-week window will also be preserved, meaning that BDCs and OMCs will submit their rates to the NPA ahead of those periods for approval, and are free to charge less than the formula implies if they wish.
Prior to this policy, the NPA set and published the Ex-Refinery and Ex-Pump prices of all petroleum products. The government frequently intervened in the computation of prices of petroleum products when prices were regulated.
Reasons for price deregulation:
• Unsustainable nature of subsidies and its impact on government finances.
• Delays in payment of accumulated subsidies resulting in the inability of BDCs to raise Letters of Credit to import products due to liquidity challenges created by the delayed payment of accrued subsidies.
• Foreign exchange (FX) rate losses arising out of rapid depreciation of the Ghana Cedi against the US Dollar.
• Unavailability of foreign exchange to cover oil imports since all BDCs depended on the Bank of Ghana for US Dollars to pay international suppliers.
NPA’S role in a deregulated pricing environment
• Ensure that BDCs and OMCs set prices in accordance with the prescribed petroleum pricing formula.
• Determine the price benchmarks BDCs must use in setting the ex-refinery price of each petroleum product.
• Provide the template that OMCs must use in the determination of their ex-pump prices for every window.
• Review Ex-Refinery prices and Ex-pump prices set by BDCs and OMCs before they implement them at the pump.
• Conduct regular price monitoring exercises to ensure that retail outlets of OMCs and LPGMCs are not selling petroleum products to consumers above the prices set by their companies.
Frequency of price reviews
There are two pricing windows in a month. 1st – 15th and 16th – end of month.
Prices are reviewed within these two windows by BDCs and OMCs. The key components of the PBU which lead to volatility in prices every window are the world market prices and the GHS/USD exchange rate.
These two variables change every pricing window and depending on whether they go up or down, they lead to ex-pump price decreases or increases.