State Grip on the Fuel Market Behind Perpetual Inefficiencies

There are few countries left in today’s world with regimes that are terrified of popular uprisings due to shortages of supplies on essential commodities such as cereals and fuel, if not outrage due to skyrocketing retail prices.

Nonetheless, it is widely practised policies of governments in many countries to have some subsidy regimes aimed at taming possible public discontent. No less than 45 countries – in advanced, emerging and developing economies – subsidise the production and distributions of strategic energy commodities such as coal, natural gas, petroleum and electricity.

It cost the world an estimated 4.5 trillion dollars, people in Asian countries being the biggest beneficiaries of the spoils of state largess. In value, Africa’s share is small, not even reaching the trillion dollars threshold. However, countries such as Egypt and Nigeria are the most addicted in cashing out taxpayers’ money in the name of protecting the welfare of the poor.

But there is little evidence to prove that the poor down the economic ladder are the beneficiaries of massive subsidies, particularly on fuel prices. To the contrary, studies carried out by Britton Wood institutions over the years discover subsidies cause painful costs on public debt, lead to additional burden on taxpayers and take away meagre resources from investments in public goods such as health, education and infrastructure.

Energy subsidies are a highly inefficient way to provide support to low-income households since most of the benefits from energy subsidies are typically captured by affluent households, according to a study conducted by the IMF in 2013.

Despite this, many regimes populist in nature fail to resist the temptation to say no to their imposing public. A politically delicate affair, many governments afraid of amassing the courage to say no, however prudent this may mean in the long term, would translate into trouble on the streets, and perhaps resulting in regime change.

Ethiopia has a page of such regrettable history from its past. One of the primary developments that had triggered popular uprisings against the government of Emperor Haile Selassie that led to his demise in the early 1970s was the boycott of services by the city’s cab drivers. They had protested an increase in the retail prices of fuel, due to pressure from upward international prices when OPEC cut production in 1973 after its members protested United States support to Israel.

Successive regimes residing up in Arat Kilo remain oversensitive since then when dealing with issues of fuel prices on the downstream market, introducing high subsidies of retail prices to cushion the population from international prices.

To their credit though the Revolutionary Democrats whose firm grip on state power over the past quarter of a century has had the political courage to toss away subsidies in 2008. Predictions of the urban poor pushed to the edge of destitution due to the policy of lifting subsidies has proven ill informed. Indeed, the state saved 18.4 billion Br in annual fuel subsidies, an amount that can finance two projects of the size of the Addis Abeba light rail system.

Subsequently, the government has taken wise policy decisions of establishing a national price stabilisation fund aiming to absorb domestic shocks from escalations of prices on the global market. Luck has been on its side over the past four years, where substantial drops in international prices of crude oil gave a sigh of relief to net oil importers, with a transfer of no less than 1.3 trillion dollars from producers. Ethiopia, for instance, alongside South Africa, Tanzania, and Kenya, is believed to have saved a total of 15 billion dollars from the drop in prices.

It also joined, since 2011, the ranks of 14 countries including Brazil, China, India, Malawi and Peru in blending ethanol into gasoline, a move which lowered prices at the retail level by 0.027 dollars a litre.

As a result, consumers in Ethiopia find themselves in a reasonably better position compared to many countries such as Turkey, Rwanda, Mozambique and Malawi. These are countries where retail prices of gas are painfully high. The lower prices at pumping stations, the higher the return is for households who get to use the extra bucks on necessities.

For all the rewarding policies the Revolutionary Democrats followed over the past few years in doing what is sensible – and not necessarily popular – the retail fuel market remains as closed in its structure as it is archaic in its operations. The many unproductive hours drivers spend; the long lines vehicles form, and the traffic disruptions they cause on main roads of Addis Abeba remains a grim reminder of the unfinished job.

Ethiopia covers an annual bill of 2.5 billion dollars to buy 3.4 million metric tonnes of fuel, 65pc of which represents diesel mainly imported from Kuwait, according to a story that appeared last week in

With additional benzene imported from Sudan, this volume of fuel powers close to 700,000 vehicles that roam around the highways of the country. At a ratio of seven vehicles to 1,000 people, Ethiopia remains one of the lowest covered countries with motor transport services; 175 in the index of 193. At a registered 1,263, it is the microstate of San Marino, surrounded by Italy, that has a lot more vehicles than its population, followed by Monaco’s 899 and the United States’ 797.

Such a small number of vehicles, with an equally small volume of fuel, should have been better operated than the case on the ground. Nevertheless, behind the acute shortages, the often lengthy and disruptive lines, as well as inefficiencies in operations lays government’s failure to deregulate prices on the retail market and provide incentives to increase operators in the downstream market.

For over five decades, Ethiopia’s downstream fuel market had been the exclusive domain of no more than four multinational oil companies. Mobil, Shell, Total and Agip were fixture symbols on sideways of Ethiopia’s highways before all but Total abandoned downstream markets in several African countries. The space they left behind was filled by domestic companies such as United Petroleum, National Oil, Dalol Oil and Nile, while OilLibya acquired the assets of former Shell.

Although more names continue to pop up lately, the expansion of networks of stations on the ground remains far from being consistent with the increase in the number of vehicles, lest the growth of the economy. For a country as large as Ethiopia, with a population size reaching 100 million, and an economy with a GDP of 64 billion dollars, there are not even 700 gas stations, compared to neighbouring Kenya’s 1,052 petrol stations.

On the surface, it may look absurd to see many businesses uninterested in getting a slash of a market with an annual turnover of 55.2 billion Br. But it should be no surprise that a downstream market tightly regulated by the state offers almost nothing to petrol station owners who are required to handle the massive volume of fuel on a daily basis. A little 0.15 Br for a litre is shared between the suppliers and the operators. Many businesses are led to believe they can find returns for their investments from the retail of lubricants and extended services in the form of convenient stores, cafes and car-washes.

It is a losing venture for an estimated investment of between 15 million and 20 million Br for a station; in fact, it is a sure way of encouraging disinvestment in a sector with the potential to grow.

The state enterprise which buys the fuel from abroad and lets the oil companies transport it home is contemplating to engage itself in the downstream market. Coming from a developmental state which believes it has the magic potion for all the troubles of society, no surprises here. Ironically, it will have no better fate than the much-hyped state retail giant in the form of “Ale Be`gimla”, whose creators’ aspiration to recreate the local edition of Walmart and flood the domestic market with cheap and reliable commodities ended up in farce.

A sensible policy to follow would be to consider to deregulate prices on the downstream market and introduce a regime of automatic pricing, departing from the decade-old practice of bureaucrats on Marshal Tito Street determining prices artificially. Such would be a market that provides petrol owners with the most crucial incentives to involve in the business; it gives them the margin they decide to compete across the streets and on a daily basis.

The Revolutionary Democrats need to see that the policy objectives of establishing a flexible pricing mechanism responsive to market realities and serving the public hardly come from the reproduction of another inefficient state enterprise. Should it be that what holds them back from deregulation is the fear of losing control, they have the prerogative of declaring an emergency in times of crises. That is how Museveni’s Uganda, as landlocked and a net importer as Ethiopia is, fares far better

Published on May 06,2017 [ Vol 17 ,No 888]



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