As a country that is utterly and unequivocally reliant on the import of refined oil (with no domestic oil extraction plants or refineries), Nepal doesn’t have the luxury of setting oil prices according to the production costs incurred. Hence, Nepal Oil Corporation (NOC) has been the mover and shaker of setting oil prices. NOC, being the only trading enterprise that has the authority to import, store and distribute oil, has established a state-owned enterprise monopoly.
Up until 1973, the multinational petrochemicals (based in India), used to supply petroleum products using their own refilling stations located in Nepal. But in 1974, after Nepal signed a Memorandum of Understanding on Petroleum Supply with India, India’s State Owned Enterprise (SOE) Indian Oil Corporation was held to be the sole fuel exporter to Nepal and NOC was deemed to be the petroleum import monopolist in Nepal. IOC would then set prices for petroleum exports to Nepal using NOC’s actual import price. Later, in a 2002 agreement an “import parity pricing system” was introduced, meaning IOC would fix oil prices for Nepal as per international spot prices. The price for local consumption was fixed by the government. NOC just used to adjust prices when administered to do so by the government. The Council of Ministers used to hold the ultimate authority to decide on petroleum pricing. The Ministry of Industry, Commerce, and Supplies (MoICS) enforced the cabinet decision, while NOC executed it. Pre 2014, Nepal had a price holding strategy which meant that the government would cover the costs of price hike in the international market and provide the oil at a subsidized price.
But in 2014, the government of Nepal implemented an “Automatic Fuel Pricing Mechanism” in petroleum products (excluding Liquified Petroleum Gas (LPG)) enabling NOC to adjust fuel prices every 14 days with regards to tariffs sent by Indian Oil Corporation (IOC). In the same year, the then Finance Minister unveiled the “Price Stabilization Fund” in the budget speech, which was established on a cost sharing basis with Nepal Oil Corporation for the sake of adjusting the fluctuation in international prices of petroleum products.
Price Stabilization Fund
Before diving into the nuances of Price Stabilization Fund (PSF), it is better to understand what the term itself entails. Price Stabilization Fund refers to the accumulation of any fund which has the prime objective of reducing the impact of extreme volatility in prices of the commodities for which said fund is set. The fund is generally used for activities that either raise or reduce the price of said commodities to maintain a certain range of the price with the purpose of lowering the aftermath of a drastic “price shock” to the general public.
Since oil prices unmistakably fall on the ‘highly volatile priced commodities’ category, the Nepal government sought after a price stabilization fund as a sort of safety net in order to reduce the load of the consumers if/when the prices of oil reach sky high. So, ideally the prices would remain somewhat stable even when the world market prices are exuberant. So it would mean that if petroleum product prices rise, the NOC will draw an amount from the fund to moderate the increased prices; if prices decrease, the NOC will deposit it into the fund to build it up against future negative shocks.
Have we benefited from PSF?
As the US Congressman Tim Walberg once said “Good intentions can often lead to unintended consequences […]” Anytime a public policy is looked at using hindsight, analysts tend to judge it on the basis of its outcome (positive or negative) and not its initial intention.
NOC has been levying 0.5 percent tax on petroleum products for the collection of the fund, which it says will be utilized to stabilize the price on harsher days. In the last few months, we’ve seen petroleum prices soar sky high reaching almost Rs 200 to Rs 181 now. NOC is quick to raise fuel prices, if it detects a change in the international market. It will raise the prices owing to the automatic fuel pricing mechanism every 15 days. But it is quite interesting to observe that NOC isn’t as quick to reduce fuel prices when the international prices are slashed down. Right now we see that India has reduced its petroleum prices by Rs 12.45/ liter for petrol and Rs16.80/ liter for diesel due to the fall of crude oil prices in the international market but the prices remain the same for the consumers in Nepal as NOC claims that they will still be operating on a loss.
This is just history repeating itself.
NOC’s Annual Audit Report prepared as of July 15, 2021 reveals that for this fiscal year, it had collected Rs 226 billion by sales of petroleum products alone. Meanwhile, the cost it incurred (without the additional costs) was Rs 158 billion while purchasing petroleum.
Purchase cost enlisted by NOC (in Kathmandu as per 16/06/2022) stands at Rs 212.58 for petrol per liter and Rs 205.95 for diesel per liter. The Retail Selling Price (as per 19/06/2022) for petrol and diesel was Rs 199 and Rs 192 respectively. When looked at the tip of the iceberg it is seen as a clear loss of Rs 13.58 and Rs 13.95 per liter of petrol and diesel respectively. But the price received from IOC as per the prices in the international market tell us a different story: Nepal got petrol at Rs 131.91/l and diesel at Rs 146.52/l.
Interestingly enough, the concealed part of the iceberg is the hidden “cost” of the respective price of petrol and diesel which includes government customs and advertisement fee/tax of Rs 25.23/l and Rs 12.03/l, road improvement tax of Rs 4/l and Rs 2/l, pollution tax of Rs 1.5/l and Rs 1.5/l , infrastructure tax of Rs 10/l and Rs 10/l, VAT of Rs 22.89/l and Rs 22.09/l, and of course, the Price Stabilization Fund of Rs 1.99/l and Rs1.92/l.
The GON collected revenue of Rs 65.61/l and Rs 49.53/l as revenues from every liter of petrol and diesel NOC sold (this excludes other costs like transportation costs, Corporations’ administrative and sales expenses, insurance cost, technical losses, dealers’ expenses and profits).
So, the question lies here, if the state collects such exuberant revenues from NOC which again is an State Owned Enterprise and deems it is incurring huge amount of losses because of such taxes and in turn adds another burden to the general public by collecting funds for stabilizing the prices which could have been lowered down by exempting certain taxes, can we still call it a huge loss faced by the NOC?
And what use is of the said fund (Rs 13 billion as of November, 2021) if the consumers still have to pay high prices for fuel because the said fund has not been utilized to lower the burden of the consumers?
This article was originally published in Nepal Live Today by Anjila Shrestha on August 8, 2022.