The Energy Regulation Board (ERB) announced a fuel price increase of about 13% on average or by K866.66 per litre on petrol, diesel and kerosene effective midnight on 11th February, 2011. In justifying the increase, the Energy Regulation Board gave the following reasons;
i. Sustained increase in prices of crude oil on the international market since the last price adjustment plus other factors such as;
· Fears that the tension in Egypt could adversely impact the Suez Canal, an important shipping route for oil between Gulf countries and the Mediterranean.
· Increased demand from China and the US
· A decline in US crude inventories by about 19 million barrels in the first three weeks of December.
ii. Depreciation of the Kwacha against the US Dollar from the time wholesale prices were last adjusted in September from K4,500/US$ to K4,750 per US$$ in December 2010.
Petroleum Feedstock cargo prices are determined by the cost of each cargo and the prevailing Kwacha/US dollar exchange rate which showed that the cost per cargo had increased by about 15.3% from US$68.6 million for the shipment procured in May 2010 to US$81 million for the December 2010 shipment. The Table below demonstrates crude oil prices in 2010.
While, it is true that the international crude oil prices were on the increase from July 2010 when they were lowest at US$73/bl to around US$91.85/bl in December 2010, the Energy regulation board did not recognize the whole picture about international Crude oil price changes in 2010. Crude oil prices actually fluctuated sometimes above the price at the start of 2010 or below. Therefore, when international crude oil prices were lower than the level at which the existing cargo was procured, no price reduction was effected to pass on such benefits while when the prices were higher that the price at which the cargo was procured, the increment was withheld resulting in the apparent cumulated adjustment recently effected by the ERB.
Furthermore, the factors given as the basis for the upward price adjustment for fuel such as tension in Egypt, increased demand in China and USA are all temporal factors which should have been mitigated against by using the Strategic Reserve Fund (SRF) as it was meant to handle such eventualities in order to stabilize fuel prices and availability of fuel in the economy.
Even the argument of the Kwacha depreciating against the US Dollar from the time wholesale prices were last adjusted in September of K4,500/US$ to K4,750 per US$$ at the time of purchasing the cargo in December 2010 although true should be challenged when the picture of the whole year is considered. The graph below shows the average mid exchange rate movements in 2010.
Source: Bank of Zambia
From the graph above it is clear that the exchange rate did depreciate from January 2010 to June 2010 from around K4, 500 per US dollar to around K5, 100 per US dollar. From June 2010 to October 2010 the Kwacha appreciated from the exchange rate of around K5, 100 per US dollar to around K4, 700. In November the Kwacha/dollar rate maintained the same levels of October 2010. In December 2010, the Kwacha saw a marginal depreciation of around 0.79% on average as opposed to the appreciation of 8.34% from June 2010 to October 2010. The December depreciation of the Kwacha of 0.79% on average is insignificant as compared to the average appreciation of the Kwacha of 8.34% observed from June 2010 to October.
It is actually safe to say that the December exchange rate depreciation effects were cancelled off by the benefit of the appreciation of the Kwacha observed from June 2010 to November 2010 when the Kwacha lost only about 0.79% of the value it had gained.
The Union is disappointed with the recent fuel price increase which on average amounts to approximately 13% because this will drive production costs upwards leading to cost push inflation. At a time when the Union has been advocating for measures to reduce the costs of production and improve the competitiveness of agricultural commodities in the export markets, the opposite is happening. We find the reasons advanced by the Energy Regulation Board for the recent fuel price increase unjustified because the Country has put enough measures such as the Strategic Reserve Fund (SRF) to handle the temporal increases in international fuel prices and shield the economy in times of these temporal shocks. If anything, during the period under review, the net effect of the appreciation and depreciation in the different months should have resulted into a minimal or no increase at all on fuel prices. The Energy Regulation Board should devise a mechanism by which the benefits of reduced oil prices in the international markets could be translated into reduced pump prices to benefit the economy. Even when a cargo has already been procured, negotiated clauses could be included to result in a win win situation for the cargo merchants and the country.