Crude oil price surge in Ghana; the way forward for government intervention

Abstract

The current research paper identifies the current dynamics in the oil price-stock market nexus to provide insightful guidelines to policy makers and government for prudent policy decision making. A research overview and suggest further research directions.

Introduction

The purpose of this paper is to provide insights to Government and policy makers to regulate the petroleum price surge

Read full articlewith a focus on the price dynamics. The price of fuel can be divide into three dimensions; the tax imposed by the government, cost of drilling, refining, transporting and profit margins for fuel companies. Indeed, the petroleum prices are deregulated in the petroleum fiscal regime and so fluctuations in the world market prices have a direct effect on prices at the pump. However, several variables determine the final price buildup, some of which are uncontrollable by the national petroleum authority, oil importers and oil marketing companies (OMC). Key variables influencing the oil price surge.

Global market prices

In recent times, petroleum products in the world market is under upward pressure largely accounted by uncertainties and supply disruptions threating the global market. However, Ghana cannot do away with the global risk as the country trades with the rest of the world.

High Imports

Recently a chunk of oil products are imported (Source IRENA). Ghana relies on about 70% energy import consumption. The malfunctioning of the Tema oil refinery which was intended to boost the local capacity has intensified the country dependency on the international market at the same time suffering from upward price movements of the international market prices.

As at early March this year, the price of Brent crude oil per barrel was $116 an upward lift from $86.51 per barrel in January. In this regard, all cost that goes into shipping, landing and discharging of the import products and all other cost incurred by the importer is added to the world price and sold to the oil marketing companies locally, both the importer and oil marketing companies will add margins to make profit.

Cedi Depreciation

The exchange rate plays a key role in the price build-up. However, Ghana purchases the petroleum products in dollars and the performance of the cedi against the dollar informs how much cedi the importer will need to purchase a certain quantity. Anjum and Malik (2019).

Findings show that heavy oil importing countries experienced currency depreciation as the prices of the international market increases. Indeed, ceteris paribus, the Cedi is exogenously
falling due to upward price movements of the international market price at the same time heavy import of oil as indicated in the Brent Spot price FOB.

Descriptive Statistics
Month Brent Spot Price (FOB)
January $86.51 per barrel
February $97.13 per barrel
March $138 per barrel

Following the trends above from FOB prices of Brent crude oil prices, it is empirically evident that the import cost requires more cedi in March, following February and January in purchasing crude oil at the international market and this account for high prices at the pump hence a downward pressure on the cedi, all other things being equal, If this continues the cedi
will also continue to suffer. Key Finding includes
Upward price movement of the international market price at the same time high import dependency accounted for relative depreciation of the cedi.

Conclusion

Tax imposition, drilling, refinery and transporting and profit margins are primary components of the prices of crude oil, a price setting to establish a balance between reference or international market price and consumer prices.

Recommendations for policy guidelines

Government and policy makers should be more careful in attempting to cut taxes as an incentive to subsidies and cushion the local consumers as that will distort the market and send a wrong signal of fuel prices by widening the pricing gap between FOB and what the local
consumer perceived.

Policy makers should target more on profit margins and oil marketing companies as an alternative subsidy to cushion the local consumer at the same time renegotiate the petroleum fiscal regime contracts with operators to increase government take as a means of supporting
scheme to consumers.