Government Responsible for Public Pricing Decisions, Says Megh Pillay

As international oil prices experience a downward trend, the Petroleum Pricing Committee (PPC) is set to meet later this month. According to Megh Pillay, a well-known authority in the field, the committee has no real influence over whether or not fuel prices at the pump should be lowered.

Recent Trends in International Oil Prices

Since last May, the price of oil has fluctuated, reflecting ongoing volatility. The cost per barrel dropped from USD 95 in September 2023 to USD 76 by the end of December.

By June 2024, the price rose slightly to USD 78, settling around USD 73 recently. The last meeting of the Petroleum Pricing Committee occurred on May 24, and the next is scheduled for September 24.

Some may question whether an earlier meeting should have been convened.

Under current law, the PPC is required to meet as often as necessary, with a minimum of once every four months.

Historically, the committee met twice within a single week in late September and early October.

During that time, prices for gasoline and diesel were set at Rs 72.10 and Rs 60, respectively. Just a week later, gasoline prices were reduced to Rs 69, while diesel rose to Rs 63.95.

Factors Influencing Future Oil Prices

The future of international oil prices primarily hinges on two factors: demand from China, the world’s largest consumer, and supply from OPEC+. Recently, China’s demand has weakened due to a slowdown in economic growth, a housing crisis, and rising unemployment, among other issues.

In June, OPEC+ announced the removal of its voluntary reduction of 2.2 million barrels per day, resulting in a drop in Brent crude prices to USD 75.

As the organization gradually implements this reduction in the fourth quarter of 2024, more oil will enter the market.

With expectations that reserves will only deplete by about one million barrels per day until the year’s end, the balance between production and global demand—key determinants of global pricing—will likely remain stable.

Thus, daily volatility is anticipated, but long-term price stability is expected. Given that Mauritius imports oil not on a daily basis but at intervals of a few weeks, the impacts of daily price fluctuations are significantly mitigated.

Political Context and its Implications for Fuel Prices

In the lead-up to elections in Mauritius, could the PPC consider lowering pump prices?

The Petroleum Pricing Mechanism (PPM) has not set detailed prices for several years, as surplus revenues have been directed away from Price Stabilization Accounts, which were originally intended to stabilize prices.

These accounts have remained in deficit, amounting to Rs 4 billion to Rs 5 billion.

The government intervened with a Rs 250 million injection last October to lower gasoline prices.

This underscores that any decisions regarding public pricing are ultimately made by the government rather than the PPC.

The deficit in the Price Stabilization Account (PSA) has not decreased between January and May, remaining at Rs 4.2 billion.

However, this deficit should not necessarily preclude a price reduction if deemed appropriate. As noted, the government had previously injected funds into the gasoline PSA.

Impact of Fuel Prices on Inflation

The disconnect between fuel prices and international market rates creates distortions within the economy that can be difficult to correct.

When prices do not decrease in response to falling global rates but rise when prices increase globally, it leads to artificial inflation.

It is widely recognized that consumer goods and service prices tend to increase immediately with rising fuel costs but rarely adjust downward when fuel prices drop.

Bakers, for instance, have frequently asked for permission to raise bread prices, citing the impact of diesel costs.

Does the price of diesel counteract the subsidies the government offers on flour? Yes, this creates further economic distortions that contribute to inflation, complicating management.

In Mauritius, pump prices do not decrease when global costs fall, yet they increase when international prices rise.

Bakers have valid concerns, as the transportation sector and other industrial operations also face rising fuel costs.

Thus, it is crucial to refrain from increasing diesel prices, as such actions can create a ripple effect across all goods and services in the economy.

Economic Growth Forecast and Fuel Prices

Will the absence of fuel price reductions at the upcoming PPC hinder the projected 6.5% growth for Mauritius’ economy this year?

It is challenging to predict. The current situation has persisted for some time. Oil price fluctuations are generally buffered by the intervals at which Mauritius imports oil.

The island’s economy is less susceptible to daily fluctuations since oil prices are primarily driven by larger economies like China and India. Should these economies slow down, OPEC+ could reduce production.

In Mauritius, a debt situation has been artificially created concerning the PSA.

Payment for Oil Imports in Rupees

Is it wise to import fuel using Mauritian rupees? This would diverge from the global norm in the oil market, as oil transactions are exclusively conducted in dollars.

The ongoing embargo on Russia has led to alternative negotiations, with some countries, like China, settling payments in yuan, benefiting Russian imports of Chinese goods.

However, the STC has reported that oil invoices are now paid in rupees.

An analysis reveals that the cost of importing oil in rupees may actually be equivalent to or higher than the traditional dollar-based payments.

When I worked at the STC, annual oil imports cost Rs 45 billion; that figure has now risen to Rs 66 billion.

Ultimately, suppliers will still demand payment in dollars, as oil cannot be traded in rupees.

Source: Defi Media