Oil Price Fall Has Nominal Implications

Economic advisor to Prime Minister Dr. Chiranjibi Nepal is a well-known economist. At a time when the oil prices are falling, Dr. Nepal spoke to New Spotlight at his office in Singha Durbar on what implications that would have on the country's econom

Dec. 26, 2014, 5:45 p.m. Published in Magazine Issue: Vol: 08 No. -13 December. 26- 2014 (Poush 11, 2071)

How do you assess the implications of the falling oil prices to the Nepalese economy?

Nepal does not import oil directly from the global market. Nepal Oil Corporation receives the oil from the Indian Oil Corporation, which charges up to 2.5 percent in commission for delivering the oil at the Nepal depot at Raxaul. Again Nepal government imposes various charges, including VAT, which accounts for up to Rs. 35.00 per liter. Similarly, there is also the commission for the petrol pump dealers, the transport cost, and other interest rates. All these make Nepal’s petroleum prices expensive even at the reduced global rate of petroleum.

Don’t you think the NOC is making a huge profit out of this?

Although the Nepal Oil Corporation is making a certain amount of profit in the recent days, it is not certain that the profit margin remains there forever. Thus, the NOC is creating a separate fund where it can put the profit money so that it can be used in case of rise of the prices again at the international market. Now, the NOC is charging an additional Rs. 5.50 for each liter of Petrol, Diesel, Kerosene and Aviation fuel. This money will go to the fund. Since the fall of the prices began, the NOC has already collected around Rs. 557 million in the fund. This is the reason the government is not reducing the price as per the international market. The NOC has already reduced a certain amount of money in petroleum products. However, it has not made any difference in the transport cost. People have not felt any relief from the global oil price fall. Along with this, the transport syndicate is also responsible for not allowing the fall in the prices. The truck syndicate is fixing the price at its will. Similarly, there is a bus syndicate which is responsible to increase the price. Due to the syndicate, the prices cannot fall as the market normally does.  The syndicates are so strong that the government is also helpless at times.

How do you evaluate the effects of the falling prices?

The massive fall in oil prices sends many ripple effects in the economy of other countries. Such fall is an indication of the global economic slowdown. Some argue that a massive fall in oil price is a calculative aim to crumble Russian and Iranian economies, as both of these heavily rely on oil. As there are so many complexities, the price may go to 55 dollars per barrel. As the global economy is heading towards a recession and the major economies are predicted to be slow in the coming years, the demand of oil will further decline and it will put pressure on the prices. There is also the possibility to enhance the economy of the rich countries in the context of fall in the global oil price.

What is the implication for us?

For a country like us, it has some significant contributions in the economy. Nepal is likely to spend less in foreign currency to import oil. This saves some of the state coffers. Decline in the prices of international products based on oil may be likely as well. Nepal’s is a high cost economy, which is bearing 60 percent for transport. One major benefit for the government is that it will no longer need to provide additional money to import oil as in the past and NOC has already made Rs. 1.08 billion profit since the price fall.

If it is making a profit, why do people not feel any relief?

Although NOC is a government undertaking, it is paying just over Rs. 3 billion annually as interest for its over Rs. 30 billion loan taken from various banks and financial institutions. NOC has to charge Rs. 4 per liter in each petroleum product like Petrol, Diesel, Kerosene and Aviation fuel and Rs. 56 per cylinder for LPG to pay interest. NOC is paying 12.5 percent interest to Employment Provident Fund, 10.5 percent to Citizen Investment Board, 3 percent to Nepal government and 7 percent to other commercial banks. If Employment Provident Fund and Citizen Investment Board reduce the current level of interest rate as per the other commercial banks, it will provide relief to the people. There is a lot of possibility to reduce the price through a certain level of management at the government level.

Why is aviation fuel so expensive in Nepal?

So far as the price of aviation fuel is concerned, NOC is charging over 60 percent as part of current oil price. Over 70 percent of aviation fuel imported by Nepal is used for international flights and 30 percent for domestic. If we reduce the prices in aviation fuel used for domestic airlines, it will definitely provide relief to passengers.

How do you look at the technical loss?

One of the major reasons behind the high oil prices in Nepal is the volume of technical loss. The criteria used to analyze the technical loss are not scientific. The current technical loss is measured on the basis of assumption. There is 0.9 percent technical loss in petrol. Diesel and Kerosene have 0.62 percent loss. There are no scientific bases to show the technical losses and the measurement is very haphazard. There a is need to improve the system. It seems that this is the area where corruption may thrive. This is a major loss even as the transport cost has not reduced.

Will Nepal can save foreign currency?

Since the volume of import continues to rise, it is unlikely for us to see any difference in the Balance of Payment. Petroleum products alone contribute 20-22 percent or over Rs. 25 billion in our revenue. You cannot adjust the revenue structure. There are other ways to reduce the price.

What are the benefits for India?

India also produces certain percentage of oil on its own and it uses coal to reduce the burden on oil. However, our position is different -- Nepal does not use coal and cannot produce crude oil. India is giving even some subsidy to LPG. However, it is not possible for Nepal to do the same. Price mechanism of Nepal Oil Corporation is going in the right way and there is the need to modernize it. Everyone is talking about the importance of energy for the overall development of the country. Until we can properly develop hydropower and other sources of renewable energy, petroleum products will remain the major sources for our energy. However, the situation of Nepal Oil Corporation, the only institution to import oil worth 100 billion in transaction, is still pathetic. It shows our situation in the energy sector. Although we talk a lot about hydropower, the state of Nepal Electricity Authority is as pathetic as that of NOC. Looking at all these, what I find is that Nepal does not have a clear energy policy. Our institutions are not modernized. Our energy sector is neglected.

What are the economic implications?

The global economy is sluggish. OPEC countries have surplus revenues. The price fall will impact Russia and Iran. So far as Nepal is concerned, it has very nominal implications as our export level is very low. The price reduction will have internal implications. Remittances will also continue given the big cash reserve with the countries of OPEC members.

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