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Gov't reluctant in significantly adjusting petroleum price

No plan to build refinery 

Despite the falling global crude oil price the Ethiopian government is making painstaking price adjustments on petroleum retail prices in the local market.

The Ethiopian Petroleum Supply Enterprise (EPSE) is the sole government body for the importation of petroleum products while the Ministry of Trade sets retail petroleum prices upon the recommendations of the enterprise.

The public is complaining that the government did not make appropriate price reduction whilst the nose diving global price of oil. Reports indicate that since the beginning of 2015 the global price of oil went down by 40 percent but Ethiopia decreased petroleum prices by 12 percent. The government defends its position. The recent retail price of benzene 16.61, diesel 14.16, kerosene 12.43 and jet fuel is 13.95.

Tadesse Hailemariam, CEO of EPSE, told The Reporter that the public looks at the price of crude oil on international TV channels and expects the government to make price adjustments accordingly. “That is misleading and unrealistic,” Tadesse said.

“We buy refined petroleum products not crude oil. The current price of crude oil is around 35 dollars per barrel. We import refined products and this would increase the price. The refined petroleum products could go as high as 42 dollars a barrel. There is transportation cost, insurance premium, handling cost, and port service fee. The price of barrel of fuel could be around 60 dollars at the port of Djibouti. You need to add the cost of inland transportation and the petroleum distribution companies’ margin. So the retail price can not be lower than this,” Tadesse said.

According to Tadesse, the Ethiopian government made four successive price reductions on retail petroleum prices since October 2014. He said the government has continued implementing its price stabilization policy. “We are making gradual price reductions. We do not make it drastically and at one go.”

The government has its own price stabilizing mechanization. There is the Fuel Fund that the government uses to stabilize the local petroleum. “When the price shoots up we do not increase the price immediately because the public can not shoulder the cumbersome rising price. We use the money from the fuel fund to subsidize the price variation. When the prices go down we keep the price the same for some time and channel the fund to Fuel Fund. This money will eventually be used to stabilize the market when the price goes up again,” Tadesse said. The Road Fund also collects 0.9 cents from each litter for road maintenance work.   

He went on to say that the fact that the price of oil is low now does not mean that it will remain the same. “It is volatile. There is no guarantee that it will remain low.”

The falling price of oil is a relief for non oil producing countries like Ethiopia which is saving up to 600 million dollars a year from the price fall. However, the declining price of oil is a nightmare for oil exporting countries like Nigeria.

Russia’s economy is the most afflicted one by the soaring prices. The Russian government is lobbying for gauging oil production and global oil price. The Russian government organized a meeting with Saudi Arabia, Qatar and Venezuela recently and the countries agreed to freeze production with the hope of pushing the price to 45-50 dollars a barrel. Iran which is relived from years long economic sanction is producing as much as it wants. Analysts say Russia could convince Iran to freeze its production and bring it to the new alliance.

According to Tadesse, if the plan of the Russian government works, the price of oil could go up to 60 dollars a barrel. “What if it goes up to 70-80 dollars? Can the public afford that price in the local market? We should think of what would happen in the coming months.”

The other point Tadesse raised is that the Ethiopian economy is not well developed and does not respond to price fluctuations properly. “If you see the local market when the price of petroleum products is reduced by one birr you do not see proportionate price reduction in other goods in the economy.”

Ethiopia’s annual petroleum demand has been increasing 10 percent on an annual basis in the past consecutive years and has reached three million metric tons. The country’s expenditure on fuel now stands at a staggering 2.8 billion dollars. EPSE buys 100 percent of its jet fuel demand and 60 percent diesel from Kuwait. It imports 85 percent of the benzene consumption from neighboring Sudan. It buys  40 percent of the diesel and 15 percent of the benzene demand from petroleum trading companies, mostly from Yanbu refinery in Saudi Arabia. Yanbu Crude Oil refinery is the biggest crude refinery in the world owned by Saudi Aramco and ExxonMobil. It is located on the Red Sea at Yanbu, near the city of Dhahran in Saudi Arabia.

Ethiopia daily consumes one million liters of benzene, 5.8 million liters of diesel and 1.8 million liters of jet fuel. The annual kerosene consumption is 260,000 metric tons. The consumption of kerosene is decreasing as the public is using electric stoves instead of kerosene stoves. The country has 13 fuel depots in different parts of the country that can store 360,000 cubic meters of petroleum.

Tadesse said that the Ethiopian government does not have a plan to build a refinery. Ethiopia has been using the Assab Oil refinery in Eritrea until 1997. A bit earlier before the two-year border war with Eritrea, Ethiopia began importing refined petroleum products.

However, informed sources told The Reporter that EPSE was conducting feasibility studies on the establishment of an oil refinery. However, Tadesse denies the claim. “At the moment there is no plan to build a refinery. Building an oil refinery is a capital intensive investment. Due to environmental concerns you need to upgrade the refinery every three or four years. That is costly. Many countries are abandoning their refineries and import refined products.” 

EPSE is expanding its main fuel depot in Awash town. The enterprise is building six tankers each having five million liters. The expansion project includes the construction of access road and fuel unloading facility. The total cost of the project is estimated at 117 million birr. The expansion would boost the country’s fuel storage capacity to 390,000 cubic meters from the existing 360,000. 

The enterprise is also set to build a new fuel depot in Dukem town with the capacity to store 30,000 cubic meters of fuel. The enterprise is in the process to acquire land and hopes to commence construction soon.