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Domestic fuel price decisions and fluctuations in international oil prices

By Fazeel Najeeb

On 10 February STO hiked the price of diesel by 9pc per litre (an increase of MVR 0.9 from MVR 9.99 to MVR 10.89) but left the price of petrol unchanged at MVR 10.19. This is the second time STO revised the price of diesel this year. The company earlier slashed petrol and diesel prices by 8.9pc and 16.7pc respectively on 14 January.

STO has revised fuel prices fifteen times to-date from the last week of April 2017 (table 1, charts 1 and 2). Comparing these revisions against Brent price movements for the same dates shows that in their decision of 10 February, the price of diesel was increased by a wider margin (9pc) than the increase in Brent price on the same day (2.9pc).

Table 1: Date to date changes in domestic fuel and Brent oil prices

In their previous decision the price of petrol was increased by a smaller percentage (8.9pc) but the price of diesel was slashed by a larger percentage (16.7pc) than the decrease in in Brent prices (10.7pc). In their decision of 13 November 2018, petrol and diesel prices were reduced by 1.8pc and 0.8pc respectively, while Brent fell by 15.5pc.

STO also absorbs significant hikes in global oil prices. For example, Brent rose 16.6pc between 7 March and 7 May in 2018. But STO cushioned the rise and raised petrol and diesel prices by only 3.1pc and 5.0pc respectively during the same period.

It has to be acknowledged that STO’s price decisions may not be based on the same day price movements in international oil prices. Rather, there may exist a lag between global oil price movements and STO’s domestic fuel price decisions. Price decisions at times may also involve non-economic pressures.

The government entrusts the responsibility of ensuring the uninterrupted availability of petrol and diesel on STO. Therefore, the company is expected to cushion fuel consuming public and firms from volatility of international oil prices while also aiming to make profit. The IMF WEO update of January said that markets expected crude oil prices to remain broadly at the levels in January over the next 4–5 years.

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