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Editorial

February 28, 2011

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Slippery slopes

Slippery slopes
There is a sense of the inevitable about the announcement by the National Electric Power Authority that it has approved a rise of 0.33 paisa per unit by the power distribution companies. The increase is made as a result of the monthly fuel adjustment charges which are linked to international oil prices. The rise was necessitated by increased diesel fuel consumption in January, when most of the power was generated by diesel-fuelled stations. For years successive governments have used subsidies to cushion us from the cost of energy from all sources. Our donors and the IMF and the World Bank have pressured us to remove the subsidies, which the government has with been doing, but further pain awaits us in the near and medium term.
The price of oil is extremely volatile. Events in Egypt and Tunisia barely affected it, but Libya is an oil-producing nation and once instability hit it a fortnight ago oil started to climb. The benchmark Brent crude futures for April delivery hit a spike of $119.79 a barrel on the afternoon of Thursday last week before falling back to $114.55 – a rise of $3.30 on the day. Japanese analysts Nomura on last Friday were predicting that if the flow of Libyan oil was completely stopped, prices could hit $220 a barrel. It was reported on Friday night that Libya had ceased oil production — and the worst-case scenario begins to unfold. Oil may suddenly get very expensive indeed – and is going to cost all of us a lot more, and soon. This exacerbates the government’s energy problems. On Thursday the finance minister presented two proposals relating to a rise in the price of petrol to President Zardari, which he declined and deferred a decision until next week citing ‘political difficulties’ in announcing any rise in fuel prices. The first proposal was an increase of domestic oil prices by 20 percent which would allow the government to recoup the cost of imported oil plus restoring the ‘normal’ level of petroleum products taxation. The second proposal was for an increase of 10 percent, close to the actual rise in international oil-price movement – but this would not claw back the revenue lost when the government was forced by public pressure to reduce taxes the last time around. This is a dangerous game which could feed through to yet another deterioration of the fiscal deficit which is currently being managed by the printing of money. Oil is slippery stuff, and the slick slope we live on has just steepened by several degrees.
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