By George Kasakula
In a bid to stem the continuous shortfall of fuel and help oil companies recoup their losses, Malawi Energy Regulatory Authority (Mera) introduced what it called an automatic fuel price mechanism (APM).
In simple and general terms, Mera revised the fuel importation and pricing regime to allow full cost recovery for all fuel imports through APM to encourage fuel importing companies to import petroleum products to meet the demand based on market shares and the mandatory stock holding requirements.
And so under APM, fuel pump price will be adjusted to reflect fuel price movements on the international market to allow companies to recover importation costs on real time basis. Pump price adjustments will reflect the changes in the value of In Bond Landed Cost (IBLC) of petroleum products and movement of the kwacha against the US dollar.
I am told APM operates within a threshold of +/-5% which is also the trigger limit. A change in IBLC of more than 5% will trigger a price adjustment. The pricing system will link pump prices to procurement costs and exchange rate movements with a +/-5% of trigger band.
According to Mera, compensation within +/-5% change is possible through the Price Stabilisation Fund (PSF) in the price build up which has also been set at 5% of the IBLC.
PSF serves to compensate importers directly by absorbing all changes in product landing cost that are within +/-5% of IBLC.
All this is reviewed monthly.
The immediate implication of the new pricing arrangement is that the landing prices for imported products (Petrol, Diesel, Paraffin) will have to be revised upwards to reflect the actual product cost obtaining on the international market.
This also means that there will be continuous monitoring of the exchange rate on real time basis which will also form the basis for pricing petroleum. The exchange rate ruling of the day of implementing pump prices shall be used to calculate price for that month.
Mera argues the implementation of APM will bring about the confidence to all importers through the assurance of full recovery of importation costs which in turn will help to ensure uninterrupted supply of fuel products in the country.
Finance Minister Ken Lipenga had his take too, telling Malawians when he presented the budget that government is committed to an automatic adjustment of fuel and utility prices to reflect full cost recovery. This, he said, is necessary in order to reduce the burden of fuel and electricity subsidies on the budget.
He said subsidies on fuel and electricity are very expensive. In the past, fuel prices did not reflect cost-recovery levels. The price build-up for fuel was based on a “deemed price” which was always significantly lower than its in-bond landed cost (IBLC).
For example, he said in 2010, the cost of fuel subsidies was K6 billion. In 2011, the cost of fuel subsidies increased to K10.5 billion. He argued that if government had not increased fuel prices in May, the total cost of fuel subsidies by the end of the year would have been K36 billion.
Why I do I bother with all this long-winded verbiage about the intricacies of the oil world? It is once again to show how people can be cold-hearted when they are in power.
It is obvious that fuel is a strategic product and it affects you and me everyday. Any slight change in its price triggers a change in the prices of goods and services. It is essential to both production and distribution of goods and services.
And to imagine that the Joyce Banda administration can leave such a product to market forces in the name of austerity and therefore expose Malawians to monthly fuel price changes is unbelievable.
For the sake of argument, what are they saying? That every month fuel price will go up as it did last week?
Fuel is one single product whose prices are so fickle on the international market. International politics is at the very centre of it.
Through the unseen hand of fate, most of oil is produced in a volatile part of the world called the Middle East. Iran, for example, a major player of Middle East politics and a big oil producer, is in a bitter feud with the West over its nuclear programme.
Israel, a sworn enemy of Iran, believes the nuclear programme is meant to exterminate its people and has vowed to deal with it in any way the Jewish state sees fit. Many commentators believe it is a question of when and not if before Israel launches a pre-emptive on Iran to stop its nuclear programme.
All this affects oil production and distribution on the international market and, therefore, its price. It is obvious to any responsible government in these circumstances that you cannot let fuel control itself under the guise of the so called automatic fuel mechanism unless you are inviting anarchy and immerse suffering for your people.
The President should tell Malawians straight in the faces that fuel prices, left to their own devices as her government has done, will go up every month because that is what it mounts to, basically.
Let us see whether that will be acceptable to Malawians because make no mistake, at the rate we are going, a litre of petrol will cost K1,000 by December. It is simply not on and the PP government better watch out.