Is Sri Lanka subsidizing cancer with diesel?

June 18, 2012 (LBO) – Health is not a topic that is routinely covered in this column. I am not writing about health per se, but about subsidies that harm health.

Petroleum industries minister Anura Yapa said the agency is also collecting arrears from state agencies including Ceylon Electricity Board, SriLankan Airlines and had started paying down its bank debt.

In 2013 it had absorbed a 60 million US dollar charge on an oil derivative in a settlement with Standard Chartered Bank and still broken even, compared to a loss of 92 billion rupees in 2012, minister Yapa said.

Cost-based pricing

Replying queries about introducing a cost-based pricing formula he said it was under discussion but at the moment prices would be held at current levels for the moment.

“But I am not saying they will not change if world market prices go up,” he said.

“The petroleum ministry is the regulator, I do not think it should decide the prices. It should be a matter for the CPC.”

Minister Yapa said selling fuel below cost was a potential ‘bank bankrupting’ process.

In 2011 the manipulation of prices with loans from state banks which were ultimately accommodated by central bank credit (printed money) generated a balance of payments crisis and made the rupee fall from 110 to 130 to the US dollar.

In that period CPC borrowed heavily from state banks, partly to fund subsidized oil given to state-run Ceylon Electricity Board.

Energy prices were eventually raised in 2012 but after driving the economy into a crisis.

The mis-use of bank credit with people’s savings for consumption by financing state enterprise losses also reduces domestic savings available for long term investments.

State enterprise losses are also responsible for reducing Sri Lanka’s national savings rate, in a country where the private savings rate is very high.

Sri Lanka’s elected ruling class has for a long time tried to manipulate energy prices usually with printed money to maintain a deception that the ‘government can bear the burden’ creating balance of payments pressure, rupee depreciation and high inflation.

Analysts say the introduction of a pricing formula based on real costs (the laws of nature) would free the people from manipulation of prices by the elected ruling class with printed money and help maintain a strong exchange rate and low inflation.

Hedge

The oil derivative losses are also a legacy cost of attempting to manipulate oil prices during the 2008 commodity bubble.

Raising oil prices when import costs rise, reduces purchasing power of domestic economic agents by the additional amount of ‘foreign exchange’ flowing out of the country and trims their ability to purchase non-oil goods or services by the same amount, keeping the balance of payments in ‘balance’.

Reducing oil prices increases the disposable income available for spending on non-oil goods and increases total imports by the same amount.

An automatic price formula is a natural ‘hedge’ against fluctuating oil prices.

Even now the state manipulates prices, by overpricing petrol which is the cheapest fuel costing the least ‘foreign exchange’ and under prices diesel and kerosene, the most expensive fuels to import, incentivizing their heavy use.

Yesterday the price of refined petrol in Singapore was about 120 US dollars a barrel (about 97 rupees a litre at current exchange rates), diesel 126 US dollars (about 102 rupees a litre) and kerosene 126.8 US dollars a barrel (about 103 rupees a litre).

Carcinogenic

But petrol is heavily taxed.

Petrol, a cleaner fuel, is retailed at 160 rupees a litre and diesel at 120 rupees a litre by state decree, incentivizing diesel (which is now a known to be cancer causing) use over that of petrol.

Last year the World Health Organization ((Is Sri Lanka subsidizing cancer with diesel?) raised a warning level on diesel from a ‘group 2A’ (probably carcinogenic) to a ‘Group 1’ carcinogenic where there is sufficient evidence that a chemical causes cancer in humans.

A cost-based formula where diesel is priced a few rupee above petrol like in free countries would also bring health benefits especially to children by decreasing imports of the fuel, analysts say.

Meanwhile minister Yapa said Sri Lanka would introduce petrol with a 92-Octane count from January from the current 90, and there were ongoing efforts to import low-sulfour diesel.

But with the current refinery it was difficult to produce lower sulfour diesel domestically, he said.

Update II