Tension and panic have started creeping into the mind of the policymakers due to the alarming upward trend of oil price in a volatile global market. The prices rallied to their highest level since November 2014. The Western Texas Intermediate (WTI) crude price rose to US$ 75 /bbl and Brent crude increased to US$ 86 /bbl.
The world oil market was shaping towards price crash over the couple of months. The trade war between USA and China, US embargo on Iran threatening to boycott Iranian crude supply to the world market, tensions between Qatar and Saudi-led Gulf and Arab countries have created volatility in the global oil market. The price of Western Texas Intermediate (WTI) reached US$ 68.25 /bbl and Brent crude was selling at US$ 79.29 /bbl on the morning of October 19.
Bangladesh Petroleum Corporation (BPC) entrusted with the task of importing and selling crude oil and petroleum products derivatives in Bangladesh imported crude oil at US$ 81.5 /bbl and diesel at US$ 91.70 in August. Only four months back in April, the price was US$ 43.17 /bbl for crude oil and US$ 50.00/bbl for diesel. BPC is anticipating Tk 6,000-8,000 crore business losses in the fiscal year 2018-19 in the present scenario.
The crude oil price may go beyond US$ 100 /bbl if the present trend continues. Bangladesh oil industry is not matured enough for adopting market-based oil pricing yet. Bangladesh follows administered price. The government provides huge subsidy when price goes higher and try to recover the losses when price remains on the lower side. In this scenario, the present rising trend has already created great tension as the demand has steadily grown in every sector such as transportation, agriculture and power sector keeping pace with the economic growth. With the country’s general election round the corner, the government is not in a position to adjust the price of petroleum products or power. It is actually a catch 20 situation.
Possible Impact of Oil Price Hike
BPC has the monopoly in importing crude oil and refined products. It processes crude in the lone Eastern Refinery Limited (ERL) and distributes through its 100% owned marketing subsidiaries – Meghna Oil, Padma Oil and Jamuna Oil. The government purchases crude oil and refined products from different countries under government-to-government contracts. Some owners of liquid fuel-based power plants have been allowed to import furnace oil for own use.
There are reports that the price of import for private sector is considerably lower than the BPC. According to sources at the BPC, crude oil has been imported at US$ 81.5 /bbl in August 2018 while the price was US$ 43.17 /bbl in April 2018. Similarly, the import price of diesel has increased in August to US$ 91.70/bbl from US$ 50.00 /bbl in April 2018. BPC now incurs a loss of Tk 8.90 /litre in marketing diesel and a loss of Tk 12.33 /litre in furnace oil. There is, however, no loss in octane, petrol, kerosene and jet propulsion oil as these are refined from locally available condensate produced with natural gas.
Bangladesh’s energy and power industry, transport sector and irrigation are getting more and more dependent on petroleum products. Increased price of crude oil and petroleum products would create additional subsidy burden on the national exchequer. With the election round the corner, the government may not go for price adjustment soon.
Global Oil Scenario
On the supply side, the US threats of choking Iranian crude supply and extent of replacement by other OPEC members and non-OPEC Russia would largely drive the price. It is to be seen how the four years high oil price impact upon the demand growth, especially in emerging markets. However, currencies of many developing countries have suffered major depreciation in recent times causing imported oil more expensive.
US President Trump has moved away from the historic nuclear deal with Iran. As a ploy of influencing another revolution in Iran, USA has announced fresh sanctions on Iran. Many observe that tension between Iran and USA may trigger oil price touching sky high of US$ 150 a barrel if exacerbated. Iran exported 2.7 million barrels a day in May 2018. In April, Iran’s production of crude reached 3.83 million barrels a day. It planned to expand it to 5 million barrels a day by 2021. But that would definitely not happen as USA and its allies have imposed sanctions. The loss of 2.7 million barrels a day will create a huge deficit.
As the cascading effect of sanctions make their presence felt, Iranian oil exports will lag leading to increased oil prices. US has not withdrawn unilaterally from the 2015 nuclear deal and imposed sanctions. USA has also asked all countries across the board to end Iranian oil imports by November 2018. The present US sanction would have similar impacts as in 2008 when following US sanction Iran threatened closing down the Strait of Hormuz.
Iran Trump for Tramp is Strait of Hormuz
The Strait of Hormuz is a major shipping route located between Iran and Oman. It is a narrow waterway providing passage from the Persian Gulf to the wider ocean. Around 90% oil from the Persian Gulf countries -- Iran, Kuwait, Qatar, Saudi Arabia and United Arab Emirates -- passes through this route. It is also the only route of LNG export from Qatar. If for any reason the strait is closed for a month, oil price would soar past US$ 150 per barrel. In reality major buyer of Iranian crude China in all likelihood would not respond to US call of ban. India, another major buyer, has already announced of non compliance. In this situation, Iran may not go that extreme of even choking the passage through Hormuz. It’s not also sure that USA would be harsh with Saudi Arabia regarding suspect Kasogi murder issue. Still the present tensions from global geo politics would keep global oil market volatile.
What should Bangladesh Do?
Bangladesh must actively review its options for efficient use of liquid fuel. All possible and probable avenues must be explored for reducing losses and enhancing efficiency. The fuel mix for power generation must be rationalized. Solar power use in irrigation must get priority attention. Import of diesel using vehicles may be discouraged. There are so much scopes of enhancing efficiency at all segments of oil value chain. The single point mooring system of crude oil transportation from deep water would greatly reduce losses in transportation of crude oil and products through transhipment from mother vessels anchored in the deep sea. The diesel transportation pipeline from Chattogram to Dhaka would also reduce losses. Another petroleum product pipeline from Numaligarh refinery in India to Parbatipur in Bangladesh would also act well in addressing petroleum products transportation to northern region. The pipeline constructed from Godnile to Hazrat Shahjalal International Airport for JP oil delivery would also work well. All these pipelines must have fibre optics based monitoring system for policing unauthorised interference and pilferages.
Liquid fuel market has grown from 2 million tonnes to over 7 million tonnes over the past decade. Very soon it may exceed 10 million tonnes. The state-owned BPC and its marketing companies must grow as well commensurate with the growth of the sector. The liquid fuel value chain is a technically-intensive sector. Here officials of required qualification and experience must be placed at key positions for planning and managing activities at every segment efficiently. Right from negotiating contracts for crude oil and petroleum products, shipment, transportation, storage, refining, marketing and accounting require right technical personnel. Even petroleum accounting is very different. There must be strong regulator for policing efficiency of the petroleum companies in the public and private sectors. The government must also carefully review whether some more products like lubricating oil, LPG can be let out to the private sector.
Modern technology must also be introduced everywhere. Digital metering system at all custody transfer points, digital checking system for checking quality of petroleum products must be introduced. Adulteration of petroleum products must be checked and monitored. Manipulations in measurement must be eliminated. All stakeholders must know at what price BPC and the government is buying crude and other products from world market and how pricing is structured. By setting up strong regulatory mechanism and ensuring strong and efficient regulatory control, the government must move out from the monopoly of the petroleum sector. Bangladesh must not continue with liquid fuel accounting from 25% or more in power generation. Well as peaking plants, maximum limit may be 10%. For all traditional fuel-based power plants (coal and LNG) must be put into operation soon. And finally, the under construction and planned petroleum product pipelines must have fibre optic monitoring system. BPC and its marketing companies must have required minimum trained professionals considering their expanded span of works. Chairman and directors of BPC and the marketing companies must have technical background for efficiency and accountability.
Khondkar A Saleque;
NRB Energy Professional
