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Domestic fuel price administration: Is STO moving towards a more market driven approach?

By Fazeel Najeeb

18 March 2019

Fuel prices hiked, again

On Friday, 15 March STO revised its fuel prices for the second time this year; diesel was raised by MVR 0.72 from MVR 10.89 to MVR 11.61, an increase of 6.6pc, and petrol by MVR 0.60 to MVR 10.79 from MVR 10.19, an increase of 5.9pc.

STO issued a notice on Thursday, 14 March to this effect and explaining that this revision was made due to “increase in oil prices in the international market”.

MER analysis

The Maldives Economic Review published an article on 8 March analysing STO’s fuel price revisions since late April 2017. We showed that STO’s fuel price decisions appeared to be responsive (as it should be) to changes in global oil (Brent) prices, assuming that the decisions were retrospective, rather than forward-looking. STO’s explanation of the decision on 14 March showed that our assumption was correct.

Our analysis in that article was based on a comparison of daily Brent prices nearest to the date of STO’s decisions. In retrospect, we believe that using Brent price change in both per barrel and per litre since a last price decision would provide a more reflective comparison of changes in STO’s fuel and global oil prices as STO’s price decisions are taken on retrospective basis. An advantage of using this approach in the analysis is that, as shown below, it facilitates comparison between CIF prices and Brent prices.

We prefer Brent to WTI because industry analysts tend to agree that African, European and Middle Eastern crude uses Brent price as their benchmark, and that its pricing mechanism dictates values for some two-thirds of the world’s crude oil production.

Since STO’s decision on 10 February up to the most recent revision effective 15 March, Brent prices increased from USD 61.70/bbl to USD 67.59/bbl (chart 1), a 9.5pc increase over this period. Expressed in MVR per litre, Brent rose from MVR 5.98 on 10 February to MVR 6.52 on 14 March (chart 2).

Chart 1: Brent price movements since 10 Feb, USD/bbl

Chart 2: Brent price movements expressed in USD and MVR per litre

Source: Business Insider, 2019. Charts by Maldives Economic Review.

The Maldives imports diesel and petrol from suppliers in China, Malaysia, Saudi Arabia, Singapore, and the UAE. As at the end of November 2018, the UAE was by far the largest supplier (charts 3 and 4).

Chart 3: CIF value of diesel imports, MVR per tonne

Chart 4: CIF value of petrol imports, MVR per tonne

Source: Maldives Customs Service, 2019. Charts by Maldives Economic Review.

Import prices for diesel on CIF basis expressed in MVR per litre shows that in 2018 (as at end of November) Malaysia was the most competitive supplier (MVR 8.98 per litre), followed by the UAE which supplied at MVR 9.28 per litre (chart 5).

Chart 5: CIF import price of diesel, MVR per litre

Chart 6: CIF import price of petrol, MVR per litre

Source: Maldives Customs Service, 2019. Charts by Maldives Economic Review.

For petrol, the most competitive supplier in 2018 (as at the end of November) was China (MVR 8.13 per litre), followed by Singapore and the UAE (chart 6).

A comparison of CIF prices on monthly basis would of course have been more useful; however, such analysis has not been possible as this data is not published on monthly basis by the Maldives Customs Service. (We encourage MCS to start publishing monthly data to facilitate independent analysis.)

STO’s most recent price revision does not appear to fully match global price hikes between the company’s previous price revision and its latest decision. While data on more frequent import prices would have helped to put this analysis into a sharper focus, the margin between CIF prices and STO’s revised prices does not appear to be too wide. This indicates that STO continues to cushion the public and industries from effects of higher global oil prices.

A more market-reflective approach?

STO’s price decisions appear somewhat irregular. However, there appears to be a slightest of hint that the frequency of decisions is increasing, or at least is becoming less irregular of late. In the last six months prices have been revised six times, albeit not every month, leaving only the month of December 2018 without a decision (chart 7). Decisions in the preceding months were more irregular.

Chart 7: Frequency of price revisions, # times

Chart 8: Number of days b/w fuel price revisions

Source: Maldives Economic Review, 2019.

This indication is somewhat strengthened when the space between the decisions appears to decrease. The number of days between latest decision and the previous one was 33 (chart 8). The preceding space was 27 days, etc. The trend line (in red) in chart 8 indicates a downward direction in the space between price decisions.

The increasing frequency of STO’s fuel price revisions and therefore the reduction of space between revisions suggest that perhaps STO is attempting to maintain prices at a more market reflective rate. If this is the case, we encourage STO to continue to maintain this approach and to restrict decisions to economic factors only, and to continue to refrain from profit maximisation.

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