$500 Oil, are the Liberals happy?

Williem Buiter writing for Maverecon blog paints a gloomy picture about a world with $500 oil. He thinks when it comes to Oil prices, "sky is the limit". With ever increasing demand from places like India and China, he thinks Oil prices will continue to rise in spite of a global economic slowdown, all of which he thinks will adversely affect the poor.

I find that plausible. High oil prices may not be the driving factor behind Sri Lanka's inflation, but it does have a say in everyone's cost of living.

This reminds me of an exchange between me and Indi, where he (and a surprising number of my liberal tree-hugging friends, I might add) think that this high oil prices is actually a "good thing". Their argument is that high oil prices will lead to behavioral changes towards less energy use and incentivise alternative energy use. I certainly agree, but I don't think that's is enough to call high oil prices a "good thing". You will have to consider adverse consequences on the poor and commerce in general before coming into such conclusions. Forgetting all of that is succumbing into the church-of-gore global warming hysteria, which by the way, I don't think of as being "hippie", but simply, elitist. American-liberals shouldn't impose their values to people who cannot afford them. The same goes for democrat obsession about imposing environmental and labor standards in trade agreements for countries which can barely afford them.

For my part, I don't think of high oil as being either good or bad, high prices just are. In some ways, we should be happy about it. This means that millions of Indians, Chinese (and even some Sri Lankans) are climbing out of poverty and able to afford automobiles and in general, more quality of life. For some reason, this part of the story is often neglected.

However, I'm not as optimistic about the benefits of high oil rise, particularly for developing countries. There are several reasons for this,

First, thanks to high taxes and inefficient refinery, we already have higher gasoline prices at the pump, compared to the U.S. even without considering the heavy subsidies given to cover the daily losses of the state-run Ceylon Petroleum Corporation.

Secondly, any breakthrough from alternative-energy research is unlikely to be spawned by places like Sri Lanka, although my Indian friends might beg to differ. So while global price rise may indeed help incentivise alternative energy research and adaptation, it doesn't justify high taxes in places like Sri Lanka.

Thirdly, behavioral changes in the magnitude that we are seeing in the U.S. and other developed countries are unlikely to be seen in places like Sri Lanka. This is because, high consumption of gasoline in the U.S. is partly due to exuberance -- air travel, SUVs, long trips, so on. and when gas prices rise, Americans change their behavior. So SUV sales are down and Americans are driving less. But consumption of gasoline in places like Sri Lanka has more to do with necessity. Most Sri Lankans use public transport, which doesn't have good alternatives. As for people who are used to driving cars, public transport won't be appealing, given it's poor quality. So even if behavioral changes come (and it will) they will be smaller compared to the U.S. and at a greater cost in terms of living standards of average Sri Lankans.

So no, I don't think high oil prices are a good thing.

But I do have faith in human ingenuity, that when price of oil becomes unsustainable we will find alternatives. I don't know what that alternative is, I don't know whether it's solar, wind or nuclear. I don't know whether we will drive electric cars, or cars which runs on water or hydrogen. But what I do know is we will keep on driving.

For much of human existence, petroleum was a useless, gooey, waste product, until we figured out we can use it for energy. Similarly, we will find something else which can serve the same purpose. Humankind got out of the stone age, not because we ran out of stone, but because we found out new and better things. Similarly, we will come out of the oil-age, with something new and better. But in the meantime, let's be rational about the benefits of high priced oil.

See more stuff about Oil on deaned.

What's Sri Lanka's gas tax?

As readers of this blog would know, I have been trying to figure out what the total tax for petrol and diesel in Sri Lanka. I put the question out in a related article in LBO. Some people responded, you can read them here. I'm reproducing, without permission, the comment by ddm (who, by the way, I wish blogged more) :

given the frequent changes it's hard to keep track, but the best source is the customs website's tariff calculator. It's not 100% up to date but it's the closest freely accessible source of tariff information.

Before the change in May it was something like this;

Petrol - customs duty of Rs.5 per litre and a surcharge of 10% on this Rs. 5 which makes it R.s 5.50 per litre. Excise duty of Rs. 20 per litre, VAT 15% (in the last budget it was brought down to 5% but I'm not sure where this stands at the minute), Ports and Airports levy 3% and social responsibility levy of 1.5%. This is when petrol is completely imported as it is done by LIOC.

So if petrol costs Rs. 127 per litre CIF, the taxes on this would be Rs.38 at 5% VAT at Rs. 57 at 15% VAT.

According to Customs there are no tariffs, VAT, or any other levies on crude oil imports - and CPC refines 50% of its petroleum from crude oil imports (but still pays the VAT, excise on the petrol retail price).

For Diesel, again prior to changes in March, there was no customs duty or VAT, there was a Rs. 2.50 per litre excise duty, 3% PAL and 1.5% SRL.

But do check out www.customs.gov.lk - it's a great eye opener about how restrictive our import regime is. [link]

So, according to this, before the increase in May (Which was a whopping 37% for Diesel and some 23% for Petrol) The total tax is about 30% of the retail price of petrol at 5% VAT and about 44% at 15% VAT. TheIndian article, which quotes an Association of Indian Chamber of Commerce official is probably just about right when they say the total tax for petrol in Sri Lanka comes to about 37% of the retail price. That's high.

More on petroleum on deaned.

p.s. : Blogging is slow these days. I'm suddenly very busy and every time I do blog, I can think of 100 other things I "should" be doing. So if this doesn't update often, don't be surprised.

Sri Lankan Petrol : Higher in than the U.S.

Seriously, have you ever wondered why the price of Petrol in Sri Lanka exceeds that of the United States? let's do the math,

1 Liters of Petrol in Sri Lanka costs about Rs.157 (Ceylon Petroleum Corporation prices)
1 gallon of Petrol (gasoline) in the U.S. costs about $4 (average price everywhere)
1 gallon (U.S.) = 3.785 Liters (ref.)
So 1 Liter of Petrol in the U.S. would cost : $4/3.785 = $1.057
in Sri Lankan rupees that would be : Rs.113 (at 1 LKR = 107.85 USD)

In other words petrol costs nearly 40% more in Sri Lanka than in the U.S. for a country where gasoline prices are set more or less by the state. The important question is why?

Well, for starters taxes seem to be lower in the U.S. averaging 47 cents to the gallon. This includes both sales and federal taxes, which comes to about a bit less than 12% of the total selling price whereas in Sri Lanka, total tax apparently comes to around 37% of the total price. (I'd be much obliged if anyone could confirm that figure).

The tax burden says nothing of that 7 Billion rupee loss incurred by the state-run CPC this year, which will inevitably have to be financed by the tax payer.

Another reason could be that while the U.S. gasoline market is dominated by privately owned firms which responds to market incentives, to invest in efficiencies whereas Sri Lanka market is state-dominated. This makes changing prices a politically motivated exercise, where as in the U.S. this happens daily (or very often) according to market conditions. Messing up with market signals, especially holding down prices artificially while incuring losses, like the practice in Sri Lanka makes necessary long-term investments on efficiency, etc. improbable. The result is at the end of the day they have lower prices, while we have higher ones.

In short, Sri Lankan policymakers can't escape the mess they have made in policy, however much the world crude oil prices have gone up. In economic development, that's what matters most -- policy. Not Oil prices, George W Bush, or some secret neoliberal plan to take over the world. Just how you work shit at home. Our policies suck at that and that's why we are poor.

Related on Deaned, Sri Lanka's retarded Oil policy.

Peak Oilers -- Put your money where your mouth is

I knew the IPL was going to be a success, because lots of intelligent people were willing to invest their money in the gig. Now some people seem to think we are running out of oil and there are predictions of $200 barrel oil. So if you are one of those people, Art Carden of divisionoflabour has a great idea. He writes,

A few weeks ago, I read a round of prognostications about $150-a-barrel oil and resolved to test the theory by putting my part of our "economic stimulus" money in oil futures. After all, if the doomsayers are right and we are "running out of oil," then the price has nowhere to go but up. I haven't actually bought the contracts yet--I'll get to why not in a second--but July futures are at $138/barrel right now.

I've often said that you can tell whether prognosticators really believe what they're saying by looking at their portfolios (NB: our portfolio is very equity heavy and consists mostly of index funds; we're playing it by the book). Someone who is genuinely, completely, totally convinced that oil will be $200/barrel in December should act on their wisdom, load up on December crude oil futures (currently $137/barrel), make an absolute killing, and then use the money for whatever they want, like alternative fuel research. [link]

The whole thing here. Julian Simon would have been proud. Who's that? sigh. I don't know what they teach in schools these days. Here's a short premier.

Sri Lanka's retarded Oil policy

Now maybe it's just me, but it seems to me that the Sri Lankan Government's oil policy is a bit retarded. Let's summarize,

1. First, theres' a tax on Petrol (VAT, excise duties, so on)
   Some reports puts the proportion of the tax at about 37% of the total selling price which now stands at Rs.157 at state-owned CPC pumps.
   
   
2. Then, the earnings from petrol, subsidize Diesel.
   There is no real reason why diesel should cost less, but it does here in Sri Lanka. In some countries in fact, diesel is more expensive. Ironically, the richer sections in Sri Lanka have the diesel vehicles (thanks to a higher import duty on diesel vehicles) while middle and lower income earners who use motorcycles, three-wheelers, small vehicles, etc. are using petrol therefore subsidizing the rich kids. Some pro-poor policy.
   
   
3. Finally, the Ceylon Petroleum Corporation (CPC) makes a multi-billion rupee loss.
   The burden of which must be financed by the taxpayer -- which is basically everyone who buys anything. From January this year, the CPC has made a loss of about Rs.7 billion (700 Million US$)
   

So the policy is essentially this: you tax on one hand, and subsidize on the other. Taxpayer pays on both counts. That strikes to me as being rather retarded (or ingenious, depends on how you look at it).

Which other company you know does this kind of thing? I mean think, really. Can you even name a sillara mudalali (small shop owner) who'd practice this insane business model? If you could, then that person is probably out of business by now. That's a fundamental difference with governments and private initiatives.

In private enterprise, failure would mean closure. No more resources are spent on that failed project. In governments, failure usually means even more money and even more resources are spent on that project, compounding the problem.

This is especially apparent when CPC's only rival in the business, Lanka IOC managed to make a profit, without any freebies from the taxpayer. The reason for this has to do with incentives, while Lanka IOC faces market incentives, CPC doesn't. It faces political incentives, which are nearly always economically disastrous. LIOC's incentives tells them to diversify business, make productivity enhancing investments, etc. Whereas CPC's incentives instructs them to hold down prices, hire unnecessary labor, etc resulting massive losses.

To cut to the chase, yes, CPC should be privatized. There's no doubt about it. Why on earth would you, the beggars on the street, taxi drivers or anyone for that matter finance state blunders.

If you are waiting for the bright sunny day, where we'll have good governance and efficient state enterprises living the democratic socialist dream, sorry machang it ain't coming. It's time we realize that, dismantle the leftover socialism and take advantage of market efficiencies.