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Tue, 02 September 2014 08:24:21
Sri Lanka' diesel-petrol price gap worsens
30 Mar, 2007 13:37:28
March 30, 2007 (LBO) – The gap between petrol and diesel prices in Sri Lanka has widened further overnight with a hike of 7 rupees a litre by state owned Ceylon Petroleum Corporation with the second player Lanka IOC following suit.
The retail prices of a litre of 90-Octane petrol is now 104 rupees, 95-Octane petrol 107 rupees. Diesel and Super Diesel are selling for 60 rupees and 65.30 a litre.

Unlike low inflation countries with strong economic management, Sri Lanka follows the practice of countries with high poverty by cross-subsidizing diesel with margins from petrol or heavily taxing petrol while taxing diesel at lower rates.

After the latest price rise, the gap between standard petrol and diesel widens to 44 rupees from 37 or 42 percent.

Small man's burden

In Sri Lanka motorcycle riders and three-wheeler taxis as well as small passenger cars use petrol, while businesses and high income classes including politicians use super luxury diesel-driven SUVs.

Diesel passenger vehicles have a punitive import duty, putting them beyond the reach of middle class Sri Lankans.

Lanka IOC, a unit of Indian Oil Corporation which now follows the pricing of CPC says it is making a three rupee loss on Diesel, while there is a two rupee net margin on petrol now.

The state-owned CPC's costs are believed to be higher as it is heavily overstaffed with political appointees gathered over several decades.

The import price of refined petrol is now around 76 dollars a barrel compared to 74 dollars for diesel, Lanka IOC said.

But the large price difference at retail level comes from taxes on petrol.

Politico-economic myths

Critics say Sri Lanka under-prices petrol like many poor countries under a powerful politico-economic myth that it helps fight inflation.

In 2004 Sri Lanka's nationalist-Marxist Janatha Vimukthi Peramuna helped throw out a government that brought in monthly fuel price adjustments on the basis that fuel should be subsidized on a doctrine popularized as 'removing the plug.'

Though fuel prices were fixed in 2004, consumer inflation suddenly rocketed from low single digits to 18 percent as the government was forced to forgo revenue and print money to keep the subsidies in place.

The pressure from money printing also put the rupee under pressure, creating a balance of payments crisis that year. Sri Lanka abandoned direct treasury subsidies on fuel in June 2006, after squandering more than 50 billion rupees on the adventure.

Analysts point out that a sharp rise in inflation from October 2006 to January 2007 when oil prices fell, helped blow the myth wide apart, making it more difficult for money printing politicians to blame oil prices for inflation.

Consumer inflation in the capital Colombo rose from 15.4 percent in September to 20.5 percent in January as retail fuel prices were cut several times.

Analysts have pointed out that the wide disparity between diesel and petrol pricing represent an unfair tax loophole which favors the richer segments of society and the commercial sector.

In some countries diesel is priced higher as it has a higher energy content, and it is generally used in larger vehicles that cause more damage to roads which in turn require more maintenance.
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