13 January 2016

Zambia: Fuel Prices Can Drop

Photo: Daily News
(File photo).

There is an interesting phrase mostly used by economists - all other things being equal or ceteris paribus, in Latin.

It simply means holding other things constant while dealing with one factor or "with other things the same" or "all or other things being equal or held constant" or "all other things remaining unchanged," et cetera.

We are, obviously, not about to deliver a Latin or economics lesson here, but we would like to use that phrase to look at some global issue - the falling crude oil prices!

We feel that, all other things being equal, any call for the reduction of the fuel prices in the country should have been justifiable given the nose-diving prices of crude oil on the international market.

Yes, the prices of crude oil from which the fuels are extracted have fallen remarkably from the last time the Energy Regulation Board (ERB) adjusted the prices of the petroleum products.

Yes, all other things being equal, the fuel pump prices should have drastically come down.

We note that since the last reduction in the local prices, which was effected by the ERB on January 15, 2015, the crude oil prices have dropped by almost 50 per cent.

The ERB based the price reduction of that date on the December 2014 crude oil prices.

The reduction in Zambia's pump prices followed the three-month reduction of the crude oil prices of about 33 per cent, from $86.91 per barrel in October to about $58.33 per barrel in December 2014.

Therefore, since the last reduction in the local pump prices in January 2015, the prices of crude oil on the international market have fallen from about $58 to below $30 this week as per Reuters' report.

For that reason, all other things remaining the same, we would have supported any call for the reduction in the fuel pump prices, but not as things are.

Some other things - particularly the foreign exchange rate - have not been held constant; they have drastically changed.

The value of the Kwacha, which is a major determinant in the pricing mechanism of the fuel pump prices in the country, has drastically dropped.

From K6.50 per United States (US) dollar on which the January 2015 reduction in the prices of the fuel locally was based, the Kwacha is now hovering between K10 and K12 per US dollar, an almost 100 per cent reduction.

Seemingly, the two variables, the prices of crude oil and the value of the Kwacha have offset each other, hence the status quo.

Economically speaking, therefore, it would be difficult for one to expect a reduction in the fuel pump prices just because the costs of the wholesale crude oil are dropping - unless somebody is made to incur the cost of the other factors.

We recall that President Edgar Lungu had during his Press conference said that failure to adhere to cost-reflective pricing in petroleum procurement in the country had adverse impact on the budget.

By the end of last year, the Government was, as the result, expected to have spent more than K3.6 billion in subsidising fuel pump prices.

Looked at it from the positive side, the pump prices of fuel in the country could have enormously gone up given the fall in the value of the local currency.

The decrease in the prices of oil on the international market has, however, ameliorated the effects of the eroded value of the Kwacha on the prices of diesel, petrol and other petroleum products.

We and other well-meaning Zambians can only hope and pray that the performance of the Kwacha would drastically pick up so that the citizens could enjoy the full benefit of the falling crude oil prices!


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