Petro-pricing: Out of tune with ground realities

I nside Kathmandu Valley, long queues for petroleum products have become a daily fare. It is astounding to read in the media that while consumers are calling for a rational price hike, the government has turned a deaf ear to their demand. It can neither increase the prices nor find alternative ways to ensure regular supply of petro-products. Patchwork solutions will do the country no good in the long run.

It is surprising that liquefied petroleum gas (LPG) is being sold at 30% below its import cost, and kerosene, just below 5% of its cost. This subsidy is neither equitable nor justified. Kerosene is used by the lower strata among urbanites for cooking purposes and in the rural areas, it is used for lighting purposes. LPG, on the other hand, is primarily used for cooking and heating in well-off households and commercial centres like hotels and restaurants. LPG has thus become the cheapest source of energy for cooking as compared to kerosene and electricity.

This disparity has distorted sales figures as well. While the sales figure for LPG is in double digits, kerosene sales have plummeted. Continuation of this kind of distortion in pricing will be detrimental to national economy as the price of oil rises in the international market. Five years ago, petroleum products were just 20% of the earnings from exports. The same figure stood at 55% in 2005/06. In the coming years, if the current distorted prices are continued, petroleum products will cost more than the combined export earnings. Can Nepal afford this luxury? Is it not the government’s duty to rationalise its price mechanism in time?

The cross-border smuggling of gasoline has increased as it is more expensive in India. In this context, it is very important for the government to rationalise the price of petroleum products without further ado. Several commissions have been formed for the same purpose, but the government has never heeded their suggestions. For instance, Nepal could have implemented the automatic pricing mechanism several times in the past which would have ensured that domestic prices were compatible to the international prices. But it never did.

In the first phase, the government needs to increase the price of gasoline and LPG without adversely affecting the lower segment of the society, thereby curtailing the losses of Nepal Oil Corporation (NOC). It has to provide NOC with oil bonds for its working capital requirements as is the routine in other countries so that it can borrow from commercial banks pledging these bonds. In the second, it should bring the domestic prices in line with international prices. Third, it has to establish an independent regulatory body to set market prices and monitor the quality of products and services of the oil marketing companies. Fourth, the government has to open up the downstream petroleum sub-sector for the private sector. A bill regarding this is still pending in the interim parliament.

In the long run, Nepal has to look for integrated approach in the energy sector. Energy security necessitates not only an integrated assessment of options for enhanced productivity and efficiency, but also determination of optimal mix of energy sources. Achieving an optimal fuel mix for the country requires a careful evaluation of indigenous resources, scope for energy conservation, inter-fuel substitution and environmental conservation. Pricing and investment policies should consider the trade-offs of alternative energy paths such as gradual replacement of petroleum products by hydropower and renewable energy. If the LPG and kerosene were sold close to their real market value, electricity might prove to be cheaper than fossil fuels. For this, hydropower resources need to be developed. This will necessitate an integrated approach rather than a piecemeal approach.

In remote areas bereft of grid electricity, solar energy can replace kerosene for lighting purposes. Because of overall cost effectiveness and less initial investment cost, there is some rationale in using Photo voltaic (PV) lamps for lighting in rural households. The government has already started “Karnali Ujyalo” project, distributing 60,000 PV lamps for free in the Karnali zone. Instead of distributing them for free, the rural people should be provided with loans to purchase these lamps. The rural poor can save fuel cost by not having to purchase the “subsidised” kerosene if they are provided funding for the purchase of PV lamps upfront.

“Tukimara lamps” are gaining popularity in rural areas for lighting purposes. Such options should be promoted in other remote areas as well. Funding for these kinds of rational and renewable options could be arranged by eradicating subsidy for fossil fuels. Reforms in energy sector, both in petroleum and hydropower sub-sectors, are of urgent need. Procrastination on petroleum pricing adjustments might prove detrimental to the country’s economy in the long run.

Prof. Nakarmi is with the Centre for Energy Studies