Economics of Oil and Productivity: Why Income Redistribution is a Matter for Bangladesh?

Dr. Sikder Md. Anowarul Islam

The economy of Bangladesh is expected to benefit from the dramatic fall in oil prices that continued to fall so far. The consequent consumer benefit depends on the price adjustment at the domestic market commensurate with the international oil price. Oil prices have dropped by more than 40% since June, 2014 due to weak global demand and rising global output. Most global forecasts suggest that the oil prices are unlikely to go beyond $70 a barrel for next few months. It is expected that the current level of extraction will remain the level as it has been recently.

The oil price is partly determined by actual supply and demand, and partly by assumption. Demand for energy is closely related to economic activities. Supply can be affected by weather and by geopolitical upsets. If producers predict the price is staying high, they normally invest, which after a lag boosts supply. Same as, low prices lead to an investment scarcity. OPEC’s decisions shape expectations: if it curbs supply sharply, it can send prices spiking. Saudi Arabia produces nearly 10m barrels a day—one third of the OPEC total.

Four things are now affecting the global oil price as on Economist. Demand is low because of weak economic activity, increased efficiency, and a growing switch away from oil to other fuels. This is happening in low and middle income countries. Second, turmoil in Iraq and Libya—two big oil producers with nearly 4m barrels a day combined—has not affected their output. The market is more sanguine about geopolitical risk. Thirdly, America has become the world’s largest oil producer. Though it does not export crude oil, it now imports much less, creating a lot of spare supply. Finally, the Saudis and their Gulf allies have decided not to sacrifice their own market share to restore the price. They could curb production sharply, but the main benefits would go to countries they detest such as Iran and Russia. Saudi Arabia can tolerate lower oil prices quite easily. It has $900 billion in reserves. Its own oil costs very little (around $5-6 per barrel) to get out of the ground.

The main oil production changes from November to December, 2014 are: World total liquids up 150,000 bpd, OPEC up 80,000 bpd, N America up 80,000 bpd, Russia and FSU up 180,000 bpd, Europe down 70,000 bpd (compared with December 2013), Asia down 60,000 bpd etc. China is a significant though not huge oil producer and has been producing on a plateau since 2010. Production was 4.15 Mbpd in December down 70,000 bpd from November. This group of South and East Asian producers has been declining slowly since 2010. The group produced 7.57 Mbpd in December, down 60,000 bpd on November.

The price of Brent crude oil, the major trading classification of sweet light crude oil that serves as a major benchmark price for purchase of oil worldwide, slumped below US$70 per barrel, its lowest level since 2010.The recent oil market report that world oil demand is softening at a remarkable pace as the European and Chinese economies falter.

Lower oil prices if sustain should have a positive effect on domestic growth and income redistribution in South East Asia and accordingly Bangladesh. The fall in oil prices could lead to higher purchasing power and consumer spending, and hence add to real GDP. It will boost public income and enhance foreign reserve.

The fall in oil prices ultimately resulted into huge foreign exchange savings. Lower oil prices helps reduce the cost of living by lowering transport costs and bringing down inflation. Lower oil prices also pass through directly into lower fuel costs and retail electricity prices. But as the Government’BPC is the sole oil importer, consumers benefit depends on lowering petroleum prices in the domestic market. But it is unlucky to expect as government had huge subsidy since long in this sector. Import price will decrease if the government adjust exchange rate as increase in foreign reserve. The implicit income redistribution can improve the purchasing power of the poor people.

The country of Bangladesh imports around 5 million tonns (1 barrel is equal to 0.13 tonne) of fuel oil annually, including 1.3 million tonnes of crude for the country’s lone refinery. More than 400,000 tonnes of oils, including 100,000 tonnes of crude oil, arrive in the port each month. Bangladesh mainly procures gas oil or diesel, followed by furnace oil to feed expensive power plants.

Bangladesh Petroleum Corporation’ BPC right now are making profits at range between Tk1.5 and Tk.2 by selling a litre diesel. But previously BPC lost Tk.7 to Tk.8 per litre. Around 75% of the subsidy went for market consuming of diesel. BPC has to spend USD 1500 million per year, as subsidy almost it goes to quick rental power plant. It used to purchase the petroleum fuels at a cost ranging between $105 and $107 a barrel few months back. Now, it is purchasing at around $70. BPC will make profit more or less US$ 138 million per year at present market price which is 9.2% of FDI in Bangladesh.

The country has only a storage capacity of 913,000 tonnes to meet the demand for only 1-2 months. The Eastern Refinery had undertaken a project long back to raise the capacity by 350,000 tonnes. The BPC currently has outstanding debts worth around US$ 500 millions.

BPC’s diesel import is more than half of its total import of around 5.4m tonnes of petroleum products – a target set for the current fiscal year. It has been importing around 3m tonnes of diesel on an average during the past several years. The government has allowed some fuel oil-run private companies to feed their own factories and power plants. Falling oil price also have a direct positive impact on aviation firms, paints and power plants. The government should open the domestic oil market for the private sectors to bring quality service in energy sector and give benefit at retail level. The price of agricultural products and consumer goods are largely depends on oil price, and consequently income redistribution of poor peoples. (Reference: Economist, Energy Matters, Dhaka Tribune etc.)


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