Last Friday the Minister of Finance announced further increases to the prices of super gasoline and diesel. This came as no surprise. As I had mentioned before, the subsidy on petroleum products has its basis in the Petroleum Production Levy and Subsidy Act of 1974.
The removal of the subsidy can only be effected by the repeal of this Act or amendments to the relevant sections. The Minister of Energy can however change the prices of petroleum products by Legal Notice.
Section 9 of the Act creates the Levy. The Levy is used to offset the subsidy. The oil companies that produce crude oil pay the Levy. It is calculated as four per cent of the gross income from the production of crude oil. Smaller oil companies that produce less than 3,500 barrels of oil per day are exempted from paying the levy. The Minister of Finance has not told us what he plans to do with the Levy going forward. If he plans to dismantle the subsidy then the levy should also go.
For years the country’s leading economic minds had been saying the subsidy had to go. Past Governments, including the one I was part of, kept subsidy in place. The opportunity to start the process of removing the subsidy presented itself when oil prices collapsed in 2014/2015 thus making its removal less painful. Mr Imbert has seized the opportunity and has bitten the bullet.
With regard to diesel, in the last seven months, the retail price has moved from TT$1.50 to TT$2 per litre. This is a 33 per cent increase. The price of diesel had been TT$1.50 per litre since 2003. Keeping the price of diesel the same for 12 years came at a significant cost. It promoted a culture of waste and created the black market for diesel.
Can you imagine KFC keeping its prices the same for 12 years? On the other hand it may be argued that the majority of goods and services are transported using diesel—powered trucks and vans and therefore the subsidy helps to keep inflation down. While there will be an initial inflationary impact from the fuel prices increases, the economy will eventually find an equilibrium point again.
The other fuel that was impacted upon was super gasoline. This is the most used fuel in T&T. It accounts for 53 per cent of the 1.3 million litres of liquid fuel the nation consumes on an annual basis. By increasing the price of super gasoline from TT$2.70 per litre to $3.58 per litre, the Minister has totally removed the subsidy on this fuel.
In fact, the Minister may have gone too far. He told the Parliament that US$45 per barrel for crude oil equates to a retail price of TT$3.61 per litre for super. He then set the retail price just below that at TT$3.58 per litre. However, oil is not US$45 per barrel. It is US$40 dollars a barrel.
If you do the adjustment the retail price of diesel should be about TT$3.22 per litre. This means that the country is being overcharged for super gasoline. Of course that situation could change if oil prices increase.
In T&T, premium gasoline remains at TT$5.75 per litre. It accounts for just three per cent of the liquid fuels we consume. It is the preferred or recommended fuel for high performance vehicles such as Audis, BMWs etc. At US$40 per barrel for crude oil, premium is overpriced by about TT$2 per litre. If the Government is moving towards a market-based approach it should consider pricing premium at a price more reflective of market conditions.
With regard to incentives, the Finance Act of 2010 had introduced incentives for CNG vehicles. These incentives expired on December 2015 but were recently extended to 2018. The Finance Act of 2015 removed Motor Vehicle Taxes on Hybrids up to 1600 cc’s and on electric cars. The Minister has now gone a step further and announced that he would remove all taxes on CNG, Hybrid and electric cars. It is good to see that there is continuity of policy in this area.
It is also good to see private sector companies such as Automotive Components Limited, Classic Motors, Dumore Enterprises and Sterling Motors taking the initiative on CNG. With regard to Hybrids, Toyota is already selling their Hybrids into the local market. The Ministry of Energy is the owner of two Hybrid vehicles.
Given the move to a more market-based approach to pricing fuel, the Government should also have a serious look at the retail margins that gas stations get as well as the wholesale margins that are afforded to NP and Unipet with the view of improving both these margins. Improving the retail margin will help some gas station owners stay in business. Some gas stations are on the brink of closure given the increases over the years in minimum wage, green fund levy and business levy.
I will dedicate another column to CNG as it has been incorrectly said that nothing was done in the last five years.
