The Opposition’s proposal to subsidise fuel importers as a measure to ease high fuel costs, not a feasible option

Background
Economic Advisor to the Opposition Leader, Elson Lowe, made a recent proposal to the Government to subsidise fuel importers to ease the high cost burdens owing to rising fuel prices. However, Lowe failed to perform any analysis to justify his recommendation and demonstrate the feasibility of this option.

This article seeks to examine this proposal to determine whether the proposal merits serious consideration on the part of the Government.
Discussion and Analysis

Lowe’s proposal essentially implies that the Government should divert some of the revenues earned from Guyana’s share of profit oil and royalties to subsidise fuel importers. However, to determine whether this is a feasible option, one has to examine the level of fuel imports, the level of increase and marry that level of increase to the level of oil revenues the country earned for a certain period. This is exactly what was done here which is explained in further details hereunder.

Table 1:
US$ Millions Unless Otherwise Stated
2020 2021 Change % Change Imports of Fuel & Lubricant 493 823 330 66.94 BBLs/Millions 6.16 6.80 1 10.39 Daily Consumption 0.018 0.020 0.002 11.70 Average price per BBL 80 121 40.997 51.23 Source: Author’s Computation/Bureau of Statistics & GEA

In table 1 above, total fuel imports in 2020 stood at US$493M inclusive of cost, insurance and freight (C.I.F) value, and in terms of its equivalent in barrels of crude (BBLs), this represents approximately 6.16 million BBL, reflective of a daily consumption nationally of 18,000 BBLs. By the end of 2021, fuel imports increased to US$823M or by US$330M representing an increase of 67 per cent over the previous fiscal year, while the BBLs at the end of 2021 only increased by 10 per cent to reach 6.8 million BBLs or a daily consumption of 20,000 from 18,000 in 2020. This means in 2021, the country’s daily consumption of fuel increased by 2,000 BBLs per day.

Table 2:
Imports C.I. F US$M (unless otherwise stated) Fuel & Lubricant /BBLs @ 2020 Price 544 Fuel & Lubricant /BBLs @ 2021 Price 823 Difference on account of rising prices 279 % Change 51 Increase of fuel imports if price remained at 2020 level 51 Increase owing to unprecedented high prices in 2021 relative to 2020 5 Royalty & Profit Oil/FY 2021 412 Fuel import increase relative to 2021 oil revenues % 68 Author’s calculation
With this in mind, table 2 above illustrates what would have been the cost for the fuel imports in terms of BBL for 2021 which increased by 2,000 BBLs per day over 2020, using 2020 C.I.F value versus the actual C.I.F value for 2021 reflective of the higher prices.

The results illustrate that if in 2021 fuel imports cost the same as 2020, then fuel imports would have been US$544M representing an increase of US$51M or 10 per cent versus an actual increase on account of higher prices of US$330M or 67 per cent, five times more than the increase had the price remained at 2020 levels, or US$279M instead of US$51M.

Moreover, the level of increase in 2021 on account of higher prices which amounted to US$330M represents 80 per cent of the revenues earned from profit oil and royalty for 2021. Consequently, this means that if the Government were to take the Opposition’s proposal seriously, then they would have had to divert 80 per cent of the total revenues earned from oil to subsidise fuel importers for it to really translate to tangible benefits. Fortunately, the Government did not take this proposal seriously as it would have been a recipe for disaster.

Concluding Remarks
The Government has in fact implemented several other measures in response to the unprecedented rising costs. Importantly to note is that in the current unprecedented circumstance of rising costs, it is not only a Government problem, but a global and national problem for all and sundry. This means, at the individual levels, certain lifestyle changes and adjustments are necessary.

In so doing, where possible take steps to minimise costs that can be minimised at the household level, for example, most of the population reside in rural areas and can do simple things such as planting of kitchen gardens. Initiatives like these can go a far way to help cushion some of the impact until the medium to long term solutions to deal with regional food and energy security are implemented which would derive more tangible benefits in terms of improving the livelihoods of the population.

It should be noted, too, that crude oil prices are not only impacted by supply and demand dynamics globally but also geopolitical tensions. Hence, eventually, oil prices will revert to equilibrium levels. Already, prices have begun to fall from its highest point, and some global analytics firms have lowered their 2022 oil price outlook.

Finally, the analysis herein illustrates that to subsidise fuel importers would certainly not be a feasible and sustainable option.

In forthcoming articles, the author will examine these measures and other matters referenced briefly in this concluding section in a comprehensive manner.

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About the Author
Joel Bhagwandin
Director
Corporate Finance Advisory | SPHEREX Analytics
SPHEREX Professional Services Inc. | JB Consultancy & Associates
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Joel Bhagwandin is a financial and economic analyst, an academic researcher and writer, a junior business executive, and thought leader. Joel is actively engaged in providing insights and analyses on a range of public policy, economic and macrofinance issues in Guyana for the past 5+ years. In this regard, he has authored more than 300 articles covering a variety of thematic areas in public policy and macrofinance. Joel has more than fourteen years’ experience in banking, corporate finance, management, consulting, and academic research. Academically, Mr. Bhagwandin is the holder of a master’s degree in business management with specialisation in banking and finance from Edinburgh Napier University. His specialties and skills include: Corporate Finance, Banking, Capital Markets & Securities, Business Intelligence & Data Analysis.
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July 15, 2022