For many decades, the price of petroleum products on the market has been a major determinant of prices of goods and services on the market.
Fuel prices have impact on inflation and the recent records from the Ghana Statistical Service tell the full story. Companies are suffering and so do households when petroleum prices are high.
This assertion is confirmed by Investopedia, an online portal which stated that the price of oil and inflation are often seen as being connected in a cause and effect relationship.
It pointed out that as oil prices move up or down, inflation follows in the same direction.
It is a fact that oil is a major input in every economy - it is used in critical activities such as fuelling the transportation sector and running major industries.
It is logical that if input costs rise, so would the cost of end products. For example, Investopedia deduced that if the price of oil rises, then it will cost more to make plastic so a plastics company will then pass on some or all of this cost to the consumer, which raises prices and thus inflation.
There have been many scenarios to prove this point at the global level. For instance, in the 1970s when the cost of oil rose from a nominal price of US$3 before the 1973 oil crisis to around US$40 during the 1979 oil crisis, it had a huge impact on the cost of goods and services.
This helped cause the consumer price index (CPI), a key measure of inflation, to more than double from 41.20 in early 1972 to 86.30 by the end of 1980.
Kuncoro, H. (April 2011), also established that the volatility of oil price causes ‘the prices of metals, food grains and other commodities’ to go up sharply; which has a high political implications.
He further indicated that fluctuations will increase a household’s income risk and a potential output loss for business and increase government subsidies.
Similarly, Balaguer J. and Ripollés J. (February, 2012) show that ‘short-term transmission of wholesale prices to retail prices is quite symmetric for both gasoline and diesel’.
As far as oil prices affect local output, under standard considerations, their effects should be surrounded by the cost share of oil in domestic production. Interpreting oil as an intermediate input in the value-added production function is questionable if it is viewed as an imported commodity.
Under considerable assumptions, imported oil enters the production function of domestic gross output, but it does not enter the production function of domestic value added. Instead, they affect the domestic economy by changing domestic capital and labour inputs, Kalian, L. (December, 2009)
According to the Ghana Statistical Service, the year-on-year inflation increased from 13.2 per cent as at November 2013 to 17.0 per cent in 2014.
Among the major determinants of the rise in inflation is the fuel price hikes, which had an impact on the general cost of production at all levels. This has forced cost of living to go up in the country and it has now become a major political issue because the ruling party is being blamed for the present hardships.
Industry
According to the Association of Ghana Industries (AGI), the cost of production has shot up drastically mainly because the cost of fuel to run the industrial machines have gone up.
Although the companies tend to pass on the cost to consumers at certain times, it has been observed that demand tends to fall and that affects profitability.
Industries are laying off workers and their taxes paid to the state is also fast shrinking. This has been aggravated by the recent energy crisis which has forced industries to pay more for fuel.
Food and food products
Generally, the cost of foodstuffs has also risen and the food inflation index according to the GSS is a testimony to this fact.
The cause of this is obvious. The rising prices of petroleum products has forced transporters to charge higher fares for carting food products from the hinterlands to the cities.
Mahamadu Iddrisu, a truck driver who carts tubers of yam from the northern part of the country, explained to the Graphic Business that their expenditure on fuel has risen by more than 150 per cent in the last few months before the fall in the price of crude on the international market.
“What we do is to pass on the cost of the fuel to the market women who depend on our services and that reflects on the prices of yam”, he said, adding that “the same applies to those who cart of foodstuffs to the city.”
Conclusion
According to the National Petroleum Authority, it has been monitoring international prices of petroleum products, in fulfillment of its mandate to set the prices of petroleum products locally.
In a statement last week, it said, “We have observed a reduction in the international prices of crude oil and refined petroleum products as well as stability in the Ghana Cedi/US Dollar exchange rate. Dated Brent and refined products have trended downwards for some time now (Since August). A glut in the supply of crude especially in the North Atlantic region has contributed to the reduction in prices”.
Under normal circumstances, the statement said, the NPA would have reviewed the prices at the pump downward to reflect the current prices of refined petroleum products on the international market. However, due to the high under-recoveries amount of GH¢412 million as end of July 2014, the NPA is unable to review prices of petroleum products downwards.
“Over the past three months, as a result of prices remaining the same at the pump, total over-recoveries that accrued amounted to GH¢174 million and this amount has been used to defray part of the outstanding under-recoveries of GH¢412 million. This has resulted in a decrease of about 42 per cent in the total under-recoveries of GH¢412 million to GH¢237 million as at end of October 2014”, it said.
Much as this excuse may sound sensible to the NPA, which is acting on behalf of the government, it is generally hurting the economy the more.
The Research Department of the International Monetary Fund (December 2000), indicates that the rise (instability) in oil prices will raise the cost of the economy, resulting in an increase in the relative price of energy inputs and putting pressure on profit margins.
There will also be an impact on the price level and on inflation; a phenomenon which is obvious, for instance, on the tariffs of water and electricity; also major costs to industry and households.
There will be direct and indirect impact on financial markets, corporate earnings, inflation, and monetary policy.
Many independent and political analysts in the country, in various ways, have also contributed by making similar arguments that point to the fact that keeping the prices of petroleum products in the country unchanged for whatever reasons is hurting the economy more than expected and the earlier the government acts, the better for all.
There may be a missing link in the thinking of the managers of the economy but based on local and international analysis of the impact of a high price of petroleum products on an economy, the time to act is now.