Dealing with Ghana’s fuel price conundrum policies and options

Dealing with Ghana’s fuel price conundrum policies and options

Fuel is a critical resource for Ghanaians and the country’s growth and industrialization agenda. The industrial sector relies heavily on the consistent supply of petroleum products to maximize productivity and operational efficiency. 

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Petroleum-based packaging materials are crucial in preserving and transporting food products, ensuring their availability and quality. Fuel is consequential in power generation for Ghana as more than 50% of the power generated is from thermal sources. 

Power stations like the Atuabo Gas plant use light crude oil (LCO) and/or natural gas to generate electricity for Ghanaian homes and businesses, which hitherto heavily relied on power from the Akosombo hydroelectric power plant for their electricity needs. 

Many Ghanaian homes rely heavily on petroleum products like kerosene for lighting and cooking particularly in remote areas where other energy sources may be insufficient or unavailable on a large scale.

Fuel is undoubtedly essential to the daily livelihood of the average Ghanaian and significantly impacts the cost of living of many Ghanaians.  Nearly 80% of transportation fuels are obtained from petroleum. 

Price stabilization and recovery levy

The Price Stabilization and Recovery Levy was introduced under the Energy Sector Levies Act 899 to raise revenues to “create a buffer for under recoveries in the petroleum sector, stabilize petroleum prices for consumers and subsidize premix and residual fuel oil”. 

G4O

Even though the principal target of the Gold for Oil (G4O) policy is to strengthen government’s efforts at stabilizing the cedi, the countercyclical effect of this policy would be the reduction in petrol, gas, diesel, and other related product prices.

Price caps and clean energy

Price caps provide stability and predictability in the market, easing consumer anxiety during economic volatility. Adoption of clean fuels would lessen the burden of consumers.

Fuel price movements & exchange rates 

Products such as gasoline and diesel power most automobiles in the country, hence the availability and affordability of petroleum products directly impacts transportation costs and logistics, and affect the movement of goods and people.

Unfortunately, rising crude oil prices have taken a toll on both the local and global economies in the last five years with consumers in deregulated economies such as Ghana having to pay the full cost of petroleum products consumed. 

For the average Ghanaian, the last 4 years have been a nightmare, as they grapple with consistent hikes in fuel prices as at the pumps.

Petroleum price volatilities impact Ghanaian lives at both the micro and macro level. At the micro level, petroleum price movements impact cost of living and cost of doing business of individuals and industry respectively through several channels, including transportation cost, utility prices (particularly electricity), gas etc. 

At the macro level, price volatilities impact the country’s trade balance, balance of payments, inflation, Bank of Ghana’s foreign reserves position and for that matter exchange rate, etc.

In the last decade, the consumer price index for key consumption items like housing (rent), electricity, water, gas and other domestic fuels as well as transportation costs have followed fuel price movements.

Inflation and exchange rate movements have also mirrored fuel price trends.

Successive Governments recognize the undesirable impact of petroleum price volatilities on individuals, industry and the economy and have initiated various policies directly and indirectly through legislation to minimize the pressures it puts on individuals, industry and the economy as a whole. 

In 2015 the Price Stabilization and Recovery Levy was introduced under the Energy Sector Levies Act 899 to raise revenues to “create a bufferfor under recoveries in the petroleum sector, stabilize petroleum prices for consumers and subsidize premix and residual fuel oil”. 

Until 2021 when the public agitated over upward fuel price adjustments at the pumps, the PSRL proceeds were never applied to give consumers relief in periods of high product prices. The Africa Centre for Policy analysis (ACEP) therefore raised questions about “the efficiency of the levy and the delivery of its purpose”.

To contain the surge in crude oil prices and exchange volatilities arising out of the recent global turmoil, the Government of Ghana introduced the Gold for Oil (G4O) Policy to minimize the impact of petroleum products price surge on consumers.

Price caps have been applied in other jurisdictions. Price caps provide stability and predictability in the market, easing consumer anxiety during economic volatility.

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Even though the principal target of this policy is to strengthen government’s efforts at stabilizing the cedi, the counter-cyclical effect of this policy would be the reduction in petrol, gas, diesel, and other related product prices. 

The exchange rate stability will inure to the benefit of consumers, as the three key variables that significantly influence petroleum prices in Ghana remain global crude oil prices, the foreign exchange rate and the taxes and levies imposed on petroleum products.

According to the National Petroleum Authority (NPA), “the policy is also to ensure that petroleum products are procured at competitive prices resulting in relatively cheaper cost of import of petroleum products from international oil traders.

The G4O policy is being implemented with reliance on the Bank of Ghana’s (BoG) Domestic Gold Purchase (DGP) programme, where the central bank ramps up its gold purchases on the local
market to shore up the country’s gold reserves. 

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All gold produced and exported by small-scale and community mining companies are purchased by Precious Minerals and Marketing Company (PMMC) on behalf of BoG, while large-scale mining companies sell 20% of refined gold directly to BoG. The gold purchased is used for payment of the oil supplied to the Bulk Oil Storage and Transportation Company (BOST) in two channels, either through a barter trade or via the broker channel.

The gold is purchased in Ghana Cedis at prevailing exchange rates, and BoG sells the gold on the international market in US Dollars and uses the proceeds to fund the procurement of petroleum products by BOST.

After taking delivery of the petroleum products, BOST sells the fuel to the Bulk Import, Distribution and Export Companies (BIDECs) in Ghana Cedis for onward sale to the Oil Marketing Companies (OMCs)”. In spite of these efforts, it is obvious that petroleum price volatilities (particularly persistent price increases), remain a major challenge to the average Ghanaian directly through its impact on transportation and energy cost and indirectly through macroeconomic instability. It is our avid opinion that policies that allow Ghanaians to access other energy sources, among other alternative interventions would bring some relief.

Tax incentives for businesses adopting fuelefficient practices and providing subsidies for low-income individuals using public transportation can make fuel more affordable for a broader segment of the population.

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Promotion of electric vehicles, which are not tied to oil prices, can offer consumers a stablealternative, shielding them from the vagaries of fuel price fluctuations. It is instructive to note however that, higher fuel prices can stimulate positive environmental outcomes. 

Elevated prices incentivize individuals and businesses to adopt more fuel-efficient vehicles and practices, thereby reducing greenhouse gas emissions and dependence on fossil fuels. 

In navigating the impact of rising fuel prices, governments, businesses, and individuals often seek a balance between short-term adjustments and longer-term strategies. This includes investments in alternative energy sources, improvements in fuel efficiency, and the development of public transportation systems.

Also, they can influence consumer spending, inflation, economic growth and environmental considerations. Ultimately, the challenge lies in managing the immediate burdens of higher fuel costs while working towards more sustainable and resilient energy solutions that benefit both individuals and the broader economy.

The writer is an Intern Analyst at C-NERGY Ghana Ltd.

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