Thursday, April 18, 2024
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Why does Ethiopia faces a shortage of fuel

At the beginning of every month, it is not uncommon to see droves of cars line-up gas stations to fill-up on fuel. Roads get crowded and taxis stop providing their usual services. Workers arrive tired and late, unable to sit at their desks on time to carry out their tasks. And many issues are the consequences of long queues at gas stations. Statements released by officials usually contradict the reality, with officials claiming there is no shortage of fuel in the country, while drivers spend over an hour to get to a pump. This peace attempts to address this discrepancy and recurring issue that plagues gas stations alike.

Before discussing why a shortage of fuel recurs in Ethiopia, it is critical to understand the country’s economic structure and whether that structure matches with the fuel consumption patterns.

The lion’s share of Ethiopia’s GDP, which is estimated to reach over USD 110 billion, is contributed by the service sector, accounting for 40 percent of the share. Despite being the major segment of the economy, however, it is not dependent on fuel and consumes less amount of oil.

The same is true for the agriculture sector, which accounts for over 33 percent of the country’s economy. Farming and animal husbandry are almost not dependent on fuel. This is not much different for the industry sector as well. Factories rely on electricity than fuel, as the latter is cheaper and somewhat available in Ethiopia.

If each segments of the economy does not rely on fuel, it means that vehicles consume almost all of the fuel imports in Ethiopia, with the volume of fuel imported growing by 15 percent yearly. From this, it is clear to see that the fuel shortage in Ethiopia is an outcome of distribution problems, but there are other reasons too.

The retail price of fuel in Ethiopia is one of the cheapest in the world., a website that tracks the price of fuel globally, placed Ethiopia as one of the 20 countries where fuel is cheap in the world. That is not untrue.

In February 2022, a liter of benzene in Ethiopia cost 31.74 birr (USD 0.63), two times lower than the world average price of fuel. If it was Nigeria, the largest producer of oil in Africa, this might not be surprising at all. But for Ethiopia, an import-dependent country when it comes to fuel, the figures are mind-boggling.

One of the reasons why fuel is cheap in Ethiopia, even much lower than the price charged by large oil producing countries, is due to the government’s subsidy and tax exemptions applicable on petroleum products. This may be essential to stabilize the market, as fuel has a potential to cause speculations, pushing inflation high due to its strong linkage with supply of goods. It was also a factor that encouraged many to buy cars, helping government officials stabilize the cost of transportation in the country. But all of these benefits come at a cost.

Neighboring countries even sell fuel at a much higher rate than Ethiopia. In Eritrea, a liter of fuel is above USD two and it is USD 0.7 in Sudan, while gas stations in Kenya charge USD 1.15.

This reality opened a window for those that want to profit from the price difference.

A situation that has existed for decades, smugglers traffic out the fuel from Ethiopia and illegally sell it to neighboring countries, a practice that often involves drivers of oil trucks, owners of gas stations and even oil suppliers along with corrupt officials. This has gained the attention of Prime Minister Abiy Ahmed’s (PhD) administration, which is now trying to discourage smugglers by lifting the subsidy on fuel gradually, a right move considering the amount of forex spent to buy the fuel. But this may still be not enough.  

As obvious as it seems, authorities must devise a long-term plan to encourage investors interested in the production of oil, where there is 428,000 barrels of proven oil reserves as of 2016, invest in the country. This requires years of investment, so it is important to build an oil refinery plant in the country and reduce the cost of imports, and sell fuel uniform to the cost in the global market.

The problem also requires a quick fix. Authorities must improve the whole value-chain of the oil sector. This requires taking strong measures against smugglers and corrupt officials. It is also essential to take administrative measures on businesses that are involved in the hoarding of oil, to get a better offer when there is a shortage. This must be supported by policy measures, which requires reforms to be introduced to weed out wrongdoers out of business.

(Tiruneh Assefa is an economist by profession. He can be reached at [email protected])

Contributed by Tiruneh Assefa

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