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Fuel Price Reduction: Individual Gains and Social Costs

8 February 2015 07:06 pm - 3     - {{hitsCtrl.values.hits}}

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As is well know, the leaders of the present government, in the run up to the recently concluded presidential election, promised to reduce the price of fuel in keeping with the prevailing world market price. In this regard, it is commendable that they have kept their promise. No doubt, the consumers are happy that the price of fuel has been slashed giving many of them a much desired relief. However, the purpose of this article is not to go along with the popular sentiments but to have a more critical look at the decision in terms of its economic benefits to the consumers and some of the not so obvious costs to the wider society.

As is well known, this country depends entirely on imported oil for both transport and other requirements. Most of the oil is used for transport purposes, though in more recent years, oil is also used to generate a considerable part of electricity used in the country. So, when the price of oil was at a peak a few years ago, the largest share of our export earnings had to be used to pay for oil imports. The increasing price of oil also reflected in the local price of petroleum products. Since then the world market price of oil has come down drastically due to diverse circumstances. Yet, the previous government did not pass on its benefit to the consumers as the taxes on fuel were a major part of government revenue. What is noteworthy however is that, despite higher prices, the demand for oil in the local market remained high. This is evident from the increasing traffic on our roads.

 

"What we should remember is that people who adopt a consumption pattern based on cheaper oil will not be prepared for a tight economic situation that will be the result of a higher cost of fuel"





When the income of a sizable section of the population increases, more and more vehicles are imported to the country. These include all type of vehicles ranging for luxury motor cars to motor cycles. With increasing congestion on roads, the previous government gave priority to building more and wider roads to accommodate the expanding fleet of motor vehicles. Yet, traffic congestion was not eased, primarily because the then government did not give priority to public transport. For instance, the number of three wheelers, motor cars and motor bikes continued to increase everywhere taking much of the road space. There are over 800,000 three wheelers in the country today, while there are over 500,000 motor cars. The number of motorcycles is more than 2.5 million. (Source: Department of Motor Traffic, 2014)

What does the official data on vehicle registrations mentioned above indicate? It is clear from the data that, in spite of the high price of fuel, the country’s vehicle fleet has expanded steadily over the last ten years. The following Table shows the breakdown of the fleet of vehicles by type of vehicles by mid 2014.
It is obvious from the statistics given above that most of the vehicles are for private use. So, when fuel price goes down, it is mostly private vehicle owners who benefit. So, it is reasonable to assume that the use of private vehicles will be encouraged by a significant reduction of fuel price. The results would naturally be more congestion on roads, more environmental pollution, more traffic accidents, greater demand for imported fuel, etc.

 

"So, a blanket reduction of the price of fuel can encourage greater use of private vehicles leading to more congestion on roads, more accidents, more air pollution, greater demand for imported"




The composition of the vehicle fleet given in the above Table  points to many issues. While there are 800,000 three wheelers and 2.5 million motor cycles, there are only 92,000 buses for a population of 20 million people. While an average buss carries about 50 passengers at a time, motor bikes and three wheelers provide private transport to a majority of the population. As is well known, road congestion is mostly caused by the above and other private vehicles due to their sheer numbers. Most of these private vehicles use petrol while heavy vehicles like busses and trucks that carry passengers and good respectively generally use diesel. So, a blanket reduction of the price of fuel can encourage greater use of private vehicles leading to more congestion on roads, more accidents, more air pollution, greater demand for imported fuel, etc. Is this what we want ?If not, how can we adjust our policy to offer greater benefits to the wider public and avoid adverse consequences of cheaper fuel?

Fuel is not an ordinary commodity like a widely consumed food item. Firstly, it is an intermediate good that affects different population groups in diverse ways. While some of the consumers are super rich who are driven around in their luxury land vehicles. Others are poor and struggle to find the cheapest way to get around for work and other purposes. There are still others who aspire to have some mode of private transport which is more comfortable and convenient than over-crowded buses. Do we want to adopt a state policy that treats these diverse groups equally? Or do we want a policy that cushions the low income groups against economic increasing pressure ? If we answer the last question in the affirmative, then the most sensible and equitable policy option becomes quite clear: adopt a pricing policy that encourages and supports public transport but does not encourage and subsidize private transport. Such a policy can be not only socially just but also help avoid many other issues. How such a policy can be formulated can be left to a group of specialists drawn from the relevant fields.

An important issue that also needs to be kept in mind is that the price of oil is a major issue in the global economy that has a differential effect on different countries. When the price goes down, importing countries benefit while the exporting countries get adversely affected. When the price goes up again, the pattern will naturally be reversed. So, it is always sensible to adopt a long term perspective and adopt policies accordingly.

For instance, Sri Lanka being a net importer of oil  should be ready to face a steep rise in the price of oil in the near future by reducing its level of dependence on imported oil This could be done by adjusting its transport and energy policies in keeping with its actual resource endowments. What we should remember is that people who adopt a consumption pattern based on cheaper oil will not be prepared for a tight economic situation that will be the result of a higher cost of fuel. In other words, if we could use at least part of the savings accruing from lower cost of oil imports today to invest in public transport and energy saving technologies, we would be better prepared to face future challenges in the above regard.

This is in addition to various other benefits that we could reap from a policy that curtails private transport and avoid the attendant adverse consequences mentioned above. If for some reason, the price of oil remains low in the next few years, it will only be a win-win situation for the country. Yet, the truth is that most of the political decision makers are members of the middle and upper middle classes and have given up public transport for the rest of their lives. They naturally take the car culture for granted.

 
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  Comments - 3

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  • Silva Tuesday, 10 February 2015 06:25 PM

    There are so many advisers but when you look the public transportThe service is very very poor. If you look at railway the service is very bad.So our country will not develop with the rate of this corruption and let the people use their transport mode and fill their needs till they die.Practical is better than perception.

    dilip mohanlal Tuesday, 10 February 2015 05:24 PM

    Adding to Prof Hettige another fact is that the CPC owes in excess of Rs 500 billion to the state banks. The ability to repay these loans is greatly reduced when the price of fuel is reduced. Atleast the reduction should have been postponed until all such loans were repaid making the CPC debt free. As of now the interest payments on these loans are staggering.

    Kelaniya Some Monday, 09 February 2015 09:35 PM

    We said Sir,Rullers of country, must welcome your advise to improved common transportv mode


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