* This is my article for the monthly magazine published in Kathmandu, Nepal, January 2015 issue.
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Cheap oil: an opportunity to deregulate and demonopolize the oil industry
The continued decline in global oil prices is at least
good news for many developing economies who can take advantage to grow faster. After
all, most economic activities require oil input – from buses and cars, tractors
and fishing boats, airplanes and ships, bulldozers and backhoes, oil power
plants and generator sets, and so on.
Current low prices have not been seen since six or more
years ago. Below are the charts for the last five years (left) and past month
(right) of West Texas Intermediate (WTI) crude prices.
Figure 1. Crude
oil price at WTI, last 5 years and last month ending December 26, 2014
While some big oil companies and their allied firms in
other industries are not happy with this fall, most
industries and sectors that rely on bought oil products
are relieved. People who save on their land travels because of high oil prices
can now drive and visit more places as their cost per trip has significantly
gone down. Airlines, shipping lines and bus lines should be capable of cutting
their fares as their fuel costs have
significantly declined. All these help expand the production of goods and
services, eventually fuelling economic activates.
But why have world oil prices gone down this much recently?
The quick answer could be the expansion in oil supply, much larger than the expansion
in demand for oil.
On the supply side, the huge output from US shale oil, plus
Canadian oil have swamped many oil importing countries’ inventories, and OPEC
member countries did not cut their collective output as they used to do,
retained its output at around 30 million barrels a day in order to protect
their global market share.
On the demand side, some industrial countries experienced
low or flat growth. Japan even went into a recession in 2014. Thus, their oil
demand either went flat or negative. Meanwhile cars’ fuel efficiency worldwide
is improving, meaning they can run longer stretch of roads with the same amount
of oil.
The reduction in global oil prices is also reflected in
Nepal’s local oil prices, as shown below.
Figure 2. Diesel
prices in Nepal, in US$ per liter, period ending December 22, 2014
From this writer’s limited readings of the oil sector in
Nepal, three interrelated issues stand out.
First, the oil shortage in some areas of Nepal in recent
weeks, an ironic situation since the world is awash with an over-supply of
cheap oil. The reason given was that the
“fuel
supplied by Indian Oil Corporation (IOC) is not as per the standard set by
Nepal Oil Corporation… officials are undecided on whether to return them to
India or supply them in the market.” (source:
Nepalupclose.com)
Second reason is state monopolization of oil trading
through the Nepal Oil Corporation (NOC). Oil prices are fixed by NOC’s board,
which is composed of officials from the Ministry of Commerce and Ministry of
Finance, among others.
Third reason could be oil supply monopoly of Indian Oil
Corporation Limited (IOCL) to NOC. IOCL is also a state-owned enterprise
of India, the biggest corporation there
and among the biggest firms in the whole world.
The first problem is temporary and not permanent, but it can
occur again in the future because it is an inter-monopoly agreement and
consumers normally have zero choice in a
game between monopolies.
The second problem is slowly being addressed when NOC introduced partial fuel price deregulation
in September 29, 2014, where
“NOC… will
let oil prices go up or fall by up to two per cent two times a month.” (source:
Himalayan
Times, October 19, 2014). A better approach is to fully deregulate oil pricing, competing oil
companies and gas stations can set their
prices based on the extent and degree of competition.
The third pProblem can be addressed when the oil industry
is deregulated as competing oil companies can source their oil from other
suppliers.
These measures are easier said than done but the public
have already seen and experienced how things are working or not working under a
state monopolized oil industry.
Meanwhile, many Asian economies have experienced improvement
in energy efficiency per unit of economic output. Many of the economies that
realized high efficiency gains in the last decade had access to cheap energy.
Figure 3. GDP per
unit of energy use, 2000 (blue) and 2011 (red), constant PPP $ per kilogram of
oil equivalent (HK’s level is $24)
Source: ADB, Key Indicators of Asia and the Pacific
2014.
This means that in Hong Kong in 2011, for every kilogram of
oil equivalent, its GDP rose by $24, an improvement from only $19 in 2000. In
the case of Nepal, for every kilogram of oil equivalent used in the economy,
domestic output in 2011 rose by almost $6.
Low world oil prices plus rising energy efficiency are
good combinations to implement market reforms where competition by different
players is the main regulator in protecting the public with more affordable
prices of oil and other energy products. Competing players will have wider
leeway to adjust not only to each other but also to their customers, big and
small groups alike.
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