Fuel price increase could promote smuggling
05 October 2021 | Energy
Theo Klein, Economist: Simonis Storm; “If successful, fuel retailers will lose out on lost revenues and government will collect less levies and taxes which are included in local petrol prices.”
After the Ministry of Mines and Energy announced that fuel prices will increase by 30 cents per litre (c/l), people expressed their frustrations on social media and threatened to smuggle fuel from neighbouring Angola as it is relatively cheaper. Last month, the price of petrol increased by 60 cents per litre, while the price of diesel increased by 30 cents per litre.
According to the ministry’s spokesperson Andreas Simon, the decision was made due to a series of events such as the hurricane storm in the Gulf of Mexico, uncertainties around the outcome of OPEC-plus meetings, and lastly the looming global energy crunch as China continues to grapple with energy supplies.
International prices for refined petroleum products have also been fluctuating significantly. The average price of refined petrol increased by US$3, from US$82 in August to US$85 in October, whilst the average price of refined diesel increased by US$4, from US$75 in August to US$79 in September, Simon pointed out.
The hurricane storm in the Gulf of Mexico has disrupted supply by damaging some of the oil facilities in that region. Moreover, OPEC-plus is still struggling to ramp up oil supply to agreed levels so as to match demand as the global market emerges from the Covid pandemic. This has left a shortage of supply in the market and increased the oil prices as result, he added.
The local currency has appreciated against the United States (US) dollar, from an average of N$14.77 in August to an average of N$14.42 in September, 2021. This has helped keep the recorded under-recoveries lower than they would have been if it remained the same, Simon said.
According to Simonis Storm economist Theo Klein, “the impact of smuggling on our local market will depend on how successful smugglers are in importing large quantities of illicit fuel from Angola. If successful, fuel retailers will lose out on lost revenues and government will collect less levies and taxes which are included in local petrol prices.
Household would enjoy a relief in their budgets and have more funds available for alternative expenditure items, but they could face prosecution by law enforcers as illicit trading of fuel is a legal offense. Given the difficulty in transporting large quantities of fuel illegally, and given the dangers in distributing fuel in secret, this strategy might either not be successful or only benefit a few.”
The use of fuel is widespread in economic activities such as farming, heating buildings, producing plastics and other industrial products, and logistics where fuel is used as an input for either production or operations. Logistics would include both private use of vehicles, as well as transporters of large cargo via road, air or sea.
Any business importing products transported would therefore face higher transport costs. This implies that consumers are not only paying higher petrol costs when refilling their cars, Klein pointed out.
Given the widespread use of petroleum in different business sectors, consumers are likely to face higher prices when purchasing food, clothes, furniture amongst other typical household expenditure items, since these products are transported to retail outlets via road throughout Namibia.
Of course, it depends on what extent businesses pass through higher operating costs on to the consumer. Given the current economic environment, it might be that businesses are not able to absorb increased costs and therefore pass it through to the consumer in the form of higher retail prices, he said.