Updated by Faith Barbara Namagembe at 0034 EAT on Wednesday 13th July 2022.
The last couple of years [2020 to 2022] have experienced historical extremes never before seen in the oil market. During this period, oil prices have dropped to below zero — USA’s West Texas Intermediate [WTI] on April 20, 2020 dove to -$37 a barrel in a day, and in the same stretch, Brent crude, the global benchmark for oil, peaked at $139 a barrel in March 2022.
This seesaw in energy prices was brought on by the global economic shutdown arising from the pandemic, and most recently, the Russia-Ukraine crisis. These events created uncertainty in the supply/demand of oil, disrupting the supply chain being as they resulted in oil embargoes on Russia, thereby reducing the global supply of oil. Russia accounts for nearly 10 percent of the world’s petroleum production.
The void created by Russia has so far not been filled by the world’s oil-producing countries in their respective umbrellas like OPEC [Organization of the Petroleum Exporting Countries]. This undersupply has, nonetheless, created a global demand for the resource with no immediate supply, leading to the current rise in fuel prices the world over.
In the world’s largest economy, the USA, the average price for a gallon of fuel is $4.80 [18,000 Uganda shillings] which makes it about Shs 4,736 a litre, because a gallon is made up of 3.8 litres.
Presently a litre of petrol in Uganda goes for Shs 6,280 [$1.65]; this means that on average Ugandans are paying north of $6 for a gallon of fuel. In short, somebody living in a bigger economy with more jobs, opportunities, and possibilities — USA, is spending less and saving more [because fuel prices influence everything], than someone in a country whose economy is smaller than their tenth wealthiest national — Mark Zuckerberg who’s valued at $67.3 billion; while World Bank places Uganda’s GDP for 2021 at $40.43 billion [let that sink in for a hot second].
Still and all, the soaring fuel prices are not entirely the government’s fault as there’s very little it could have done to avoid this worldwide energy jam. Correspondingly, the crusaders of fuel reserves need to know that they— fuel reserves — wouldn’t save the day because it’s highly unlikely that they would last Uganda more than a month.
The USA has the largest petroleum reserve at 727 million barrels, but with their present daily consumption of 20 million barrels, the reserve would barely last them a month. And with Uganda/Africa’s excess outright corruption vice; it’s as obvious as daylight that there wouldn’t be any fuel in the reserves to bail the country out in its time of need.
What the government can do is manage the fuel crisis as it unfolds by taking a second look at the energy industry in the country, its key players, and the actors sucking the living daylights out of the residents. This fuel prices crisis has brought to the forefront the greed of the retail fuel station owners who are silently profiting from their unsuspecting clientele, who in turn blame the government for their fuel troubles.
The retail fuel station owners buy their oil from commodities markets, which sell their crude on exchanges in the form of contracts called futures. Interestingly, the price of oil on the energy markets has been going down; contrarily, the price of fuel at petrol stations has been going up.
For instance, in March, the price of crude dropped from a 14-year high of $139 a barrel by 30 percent to $95 a barrel. However, fuel prices rose from Shs 4,971 to Shs 5,1197 in April 2022 in Uganda, a three percent increase. It’s worth noting that when oil futures are bought for a particular month, they account for the stock to be used at fuel stations the ensuing month(s).
Additionally, between June 6 2022, and July 4 this year, a barrel of Brent crude, which is the global benchmark for the price of oil, dropped by $21 from $121 to $100; but this won’t reflect anywhere on the fuel retail scale in the coming months. Instead, fuel station owners are most likely to hike fuel prices as they benefit from the supply-chain shortage narrative doing the rounds in the country even as global prices fall.
The government needs to step in to tax the extra profits the retail service station owners are inconspicuously making in these tough times because the corporation tax on their profits doesn’t suffice. And the excise duty they are paying for each litre of petrol now at Shs 1,350, is the same they paid when a litre went for Shs 4,022 in July 2021. So, the untaxed portion per litre has increased from Shs 2,672 to Shs 4,930.
It’s highly likely that under the current corporation tax environment, fuel retail service providers aren’t paying tax on their extra profits. They can lessen or reduce their corporation tax burden by carrying forward losses from previous periods which they will deduct from the business’ profits before taxation.
Or, by claiming allowable expenses which they will set against their income to reduce their corporation tax bill by up to 40 percent of that year’s expenses from their profits before they are taxed. All maneuvers acceptable by law.
To cover this loophole, the government could impose a windfall tax on the retail service providers of fuel which is a levy on companies that have recently come by profits by sheer luck, or events they are not directly responsible for. In so doing, the oil actors will share their profits with the state. India has recently introduced this tax on oil companies
On the flipside, government could get ahead of the persistent fuel crisis by temporarily easing taxes on fuel, even reducing the excise duty charged per litre, and placing a price cap on fuel. This will have a ripple effect on the lowering of fuel prices by retail service station owners. South Africa has reduced taxes on its fuel by 75 cents a litre.
The president of Uganda could also pitch in by issuing directives to control the crisis. President Nixon issued directives during the 1973 fuel crisis in the USA. One of the directives he [Museveni] could issue is: outlaw price gouging; that is, prohibit selling fuel at a price deemed unreasonable in the ongoing global economic turmoil.
He [Museveni] could also caution fuel station owners against selling fuel at prices much higher than their global market prices while emphasizing the need for dips in global prices of oil to reflect at fuel pumps. For the long term, the country should make room to transition to renewable energy by embarking on, among others, solar manufacturing. Because, the Russia-Ukraine war isn’t going to be the last supply chain disruption to the energy sector.
Meanwhile, motorists have to get used to using less fuel while paying more for it, and rest assured that this fuel crisis, like the rest before it, will disappear over the horizon