"Almost a quarter of the import bill is spent on petroleum alone which is huge for any country," said Samaratunga.

The island's petroleum bill is equal to about 45 percent of total export proceeds.

But Sri Lanka earns foreign income from the export of labour (remittances) export of government debt (foreign borrowings) as well as tourism services and foreign investment which push up demand and activity within the country, requiring more energy.

"In the last three years the petroleum import bill has doubled, not only because of price increase but because of a huge volume increase as well," Samaratunga said.

With the island's sole 50,000 barrels-a-day refinery operated by the state-run Ceylon Petroleum Corporation now meeting only a third of the country's total requirement for refined products, increased demand must be met by imports.

"If this trend continues at this pace - doubling of the petroleum bill every three years - we will need a lot of resources," Samaratunga told a forum organised by the central bank.

"To buy petroleum, you need foreign exchange. This is a major challenge for the financial status of the Ceylon Petroleum Corporation."

Sri Lanka's rulers manipulate oil prices to buy votes and then manipulate interest rates with printed money when credit demand rises, triggering balance of payments crises.

Analysts have pointed out that the Ceylon Petroleum Corporation helps trigger 'foreign exchange shortages' by not generating enough rupees from its petroleum sales, running losses and then trying to buy dollars with borrowed money.

The 'losses' in the petroleum corporation, leave spending power in the hands of petroleum users who spend them and fire additional imports, which would not have occurred if oil was market priced.

The problem can either be solved by market pricing imported energy or allowing interest rates to rise to generate more savings in the banking to finance credit to cover losses at state energy utilities.

But Sri Lanka's which has a so-called 'soft-peg' prints money to manipulate interest rates, effectively triggering a balance of payments crisis, which is then blamed on oil imports or cars.

Capital goods imports, which bureaucrats and some economists consider to be somehow superior to energy or cars, are not blamed.

Inflation

Samaratugna said international petroleum product prices have been increasing in recent decades and, being price-inelastic, the long-term trend will be upwards despite short-term fluctuations.

"There's no coming back," Samaratunga declared. "There might be slight reductions in the short term but prices are going up in the long run."

Global crude oil prices peaked at 146 US dollars a barrel in June 2008, then fell steeply after the financial crisis and recession and have now risen sharply again.

Samaratunga said in recent months, weaker demand in the European Union after the 2008-09 financial crisis should help reduce petroleum prices.

"On the other hand, turmoil in petroleum producing countries create uncertainties in supply. Reduced production means prices will increase. These two major trends work in opposite directions."

Saudi Arabia has stepped up production in recent months to make up for cuts by other oil producers helping stabilise to some extent international petroleum prices.

Also, very recently major consuming countries started releasing petroleum stocks.

"Both these developments helped stabilise international prices to some extent," Samaratunga said.

Energy Demand

The bulk of Sri Lanka's petroleum consumption goes for transport and power generation, accounting for up to 90 percent of total petroleum consumption.

Until 2000, the refinery was able to meet about half of total requirements but now two-thirds of all products are imported except for kerosene.

Especially after 2009, when the island's 30-year ethnic war ended, petroleum product use has been rising rapidly, Samaratunga said.

Petrol and diesel consumption has been increasing at a very rapid rate, and also fuel oil used to generate electricity, because of rising power consumption and a growing fleet of vehicles.

Demand for kerosene, used mainly for lighting, had fallen as grid electricity spread to cover over 90 percent of the people.

"A big proportion of electricity comes from the hydro sector which is rain-dependant," he said.

"When there's no rain, a lot of fuel oil is needed to generate thermal power. It's an unpredictable situation."

Current pressure on Sri Lanka's rupee was partly caused by low rainfall which increased thermal energy generation but the Ceylon Electricity Board also did not raise prices, leaving additional income in the hands of power users to spend on imports.

In February 2011, officials raised energy prices but Sri Lanka does not have a price formula where costs are matched to selling prices to safeguard the island's dollar peg and keep the economy stable.