By Theophilus Acheampong,
Reliable and affordable energy is basic to any country’s ability to grow and equitably share the economic gains. The consumption of crude oil and gas, and derivative petroleum products such as petrol, diesel and kerosene, features strongly in the global energy geopolitics debate.
In Ghana, as in many other countries, the price of fuel — particularly petroleum products — is both a political and an economic decision.
Before 2005, the Ghanaian state controlled the import, distribution and pricing of petroleum products. But shortages were a regular occurrence. Coupled with this, the government subsidised consumers, meaning they didn’t pay the full cost of the product. It is estimated that Ghana spent about 2.2% of its gross domestic product subsidising fuel in 2004, far exceeding the budget of the Ministry of Health.
The regime was deemed inefficient as the rules were inconsistently applied. Ineffective subsidies put a strain on the economy and often benefited middle-class consumers rather than the poor. A study indicated that almost 78% of fuel subsidies in Ghana benefited the wealthiest group while only about 3% of subsidy benefits reached the poorest quintile.
In 2005, Ghana deregulated the downstream petroleum industry as part of the debt relief package under the joint IMF–World Bank Heavily Indebted Poor Countries (HIPC) initiative. The policy had three objectives, namely to:
- remove restrictions on the establishment and operation of facilities by the private sector
- remove restrictions on the importation of crude oil and petroleum products
- remove price controls.
To give legal effect to the policy, the country passed the National Petroleum Authority Act, 2005 (Act 691), which established the National Petroleum Authority. Its mandate is to regulate, oversee and monitor activities in the downstream petroleum industry, establish a Unified Petroleum Price Fund, and provide for related purposes.
The other component of the 2005 regulatory reform was a transparent automatic petroleum pricing formula for full cost recovery. In other words, consumers would bear the full costs of petroleum products. Only some were cross-subsidised, such as premix used in the fishing sector.
In addition, Ghana’s 2009 and 2017 energy policies and the 2012 Petroleum Pricing Regulations state that:
- Ex-refinery prices of petroleum products will be based on import parity prices.
- Transportation and distribution charges for petroleum products will be regulated to ensure reasonable profit margins for transporters and distributors.
- Cross-subsidies between petroleum products will be applied, as necessary, to achieve specific national development objectives.
- Uniform national prices for petroleum products will be maintained.
Petroleum products are imported into the country by bulk distribution companies or wholesalers, which then sell them to oil marketing companies or retailers. Demand for the products, especially diesel and petrol, has grown at an average of 5% per year since 2000 due to economic growth.
While Ghana has been a net exporter of crude oil since 2010, the country remains highly vulnerable to oil price shocks because it imports a significant share of petroleum products consumed in the country and exports to others in the sub-region. These imports mostly come from Europe (Rotterdam). Consequently, the country is subject to volatility in international markets for crude and petroleum products, as seen recently with the Russia-Ukraine conflict.
Arriving at a price
Three key factors drive petroleum products prices in Ghana. First is the import parity price of the product. The second is the foreign exchange rate. The third is taxes and margins.
Imports are regulated by the petroleum authority to ensure full cost recovery, government revenue generation and uniformity of prices. Full cost recovery is based on the import parity pricing benchmark or “landed cost” of refined fuel in Ghana. The import parity pricing, quoted in US dollars, represents the price that the bulk distributors pay for the delivery at the Tema Port. This includes the free on board price, freight charges, insurance, customs duty, and port dues.
The rationale behind the import parity pricing benchmark is to have a strong relationship with the actual costs of fuel imports into Ghana. The petroleum authority employs a two-week inventory window (1st-16th of the month) whereby the two-week average of the free on board prices of the products is computed.
The historical average exchange rate of the cedi to the dollar within the two-week time-frame is then added to the equation. Charges such as port duties are added to arrive at the ex-refinery price, calculated in Ghana pesewas per litre.
Taxes and levies passed by Parliament are then added along with various oil marketing companies’ (distribution) margins to arrive at the final ex-pump price. The ex-pump price is the price the public pays for fuel at the various filling stations. Fuel taxes and margins typically make up about 40% of ex-pump fuel prices.
Ghana imposes eight levies and five margins on petroleum products. The levies are for energy debt recovery, energy fund, energy sector recovery, price stabilisation and recovery, road fund, sanitation and pollution, special petroleum tax and unified pricing petroleum fund. The margins paid to the distributors are for bulk oil storage and transportation, dealers (retailers/operators), fuel marking, marketers, and primary distribution.
Some reform options
The government and other stakeholders can adopt the following reform options to improve Ghana’s pricing in downstream petroleum markets.
Firstly, Ghana’s central bank, the Bank of Ghana, can preferentially auction or sell dollars to the bulk distribution companies at the interbank rate. This will help these companies mitigate forex pressures, especially since they often have to borrow at higher forex rates from commercial banks. A couple of basis point reductions in the exchange rate could go a long way in stabilising prices.
Secondly, the Tema Oil Refinery, which is barely functional, must be restructured. The refinery needs new ownership under a public-private partnership arrangement, improved corporate governance, and new financing to provide critical upgrades to its facilities. The Bulk Oil Storage and Transportation Company Limited must expand its storage capacity to play a more critical interventionist role in Ghana’s energy security.
Thirdly, the government needs to rationalise the various taxes and levies imposed on petroleum products. Some, such as the sanitation and pollution levy, are nuisance taxes. Others, like the price stabilisation and recovery levy, have not been fully used for their intended purposes. This levy has mainly subsidised premix and residual fuel instead of the other legal requirements under the Energy Sector Levies Act, 2015 (Act 899) to “stabilise petroleum prices for consumer”.
The petroleum authority’s latest ex-refinery price build-up data shows that both premix (used by fisherfolk) and residual fuel oil (used by industry) are heavily subsidised or discounted by 89% and 77%, respectively. In other words, these categories of consumers are paying 11% and 23% of the actual landed cost of the fuel.
Moreover, the evidence shows that illegal industrial fishing trawlers dominate Ghana’s fishing industry, with artisanal fishing on the decline. Thus, there is a need for proper economic pricing of premix and fuel oil by rationalising the heavy subsidies on them and channelling the savings to stabilise petroleum prices for all consumers.
#Theophilus Acheampong, is an Associate Lecturer, University of Aberdeen