Behind Burma’s fuel price rise

The fuel price increase in Burma last week has been greeted by shock, amazement, and despair. The question many are asking is, how can this be?

How can a country so rich in gas and oil be unable to provide its own citizens with affordable supplies? How can a government raise prices such a huge extent, especially when it is selling gas for what must be an incredible profit?

So far, various explanations have been put forward by analysts. Some have suggested the economic mismanagement of the regime is largely to blame, while others have pointed to an emerging foreign exchange and budgetary crisis as reasons behind the move.

Some others have warned the political machinations of the regime should not be underestimated. The price increases, in sparking off popular protests, could serve as a pretext for the State Peace and Development Council to launch another political crackdown, prolongation of National Convention proceedings or even postponement of the upcoming visit by UN envoy Ibrahim Gambari.

All these may perhaps be true. But to fully understand the pressures behind the increase in fuel prices, it is also important to consider some deeper structural characteristics of the Burmese economy and oil and gas sector.

To begin, one bold fact: Burma is essentially a diesel-powered economy. We see this in the buses, trains and trucks that rumble around the country. We also see this in the dilapidated power plants that sometimes generate electricity. Most of all, we see this in the ubiquitous portable generators that exist in nearly every home, factory and shop that can afford one.

For a long time now, diesel prices have been kept artificially low through subsidies. And as demand for diesel has continued to grow in tandem with an expanding economy, the amount spent on these subsidies has similarly expanded, posing an ever increasing strain on the regime’s finances.

In an attempt to increase the supply of diesel, the regime attempted to encourage greater crude oil output from the domestic oil industry in recent years. This has not met with great success, as onshore wells are declining in productivity (the “peak oil” phenomenon) and there are few, if any, offshore wells.

In any case, sources suggest, even if higher volumes of crude could be obtained domestically, another bottleneck would have developed around the available refining capacity in Burma. Burma’s ageing refineries simply cannot refine crude volumes sufficient to meet demand. These refineries, in addition, are incapable of refining crude from other sources with different sulfur content, thus ruling out imports of crude to augment domestic supplies.

The only solution then, is to import diesel. And as this is usually done at spot market prices, it is an extremely costly solution. But wait. Surely revenues obtained from gas sales should be enough to cover the higher expenditure?

It is true that such gas sales provide some revenue to help in defraying the cost of diesel imports. But it is questionable if they are sufficient to cover the escalating cost.

First, most of the gas contracts were negotiated some time ago and have probably locked-in much lower prices than those prevailing today. These lower gas prices cannot compensate for the higher spot prices for diesel.

Second, revenues are not always obtained in such sales. Sources indicate that the deal with Petronas, for example, involves the SPDC bartering its share of gas production for diesel from the Malaysian company on pre-agreed terms, without any money being exchanged.

Third, it should also be remembered that though revenues may be obtained from gas sales, expenditure on refined gas products are a drain on such income and can diminish what is available for diesel imports. It is a great irony that while Burma sells unrefined natural gas to neighboring countries, due to lack of capacity to purify such gas domestically, it must import refined gas products at substantially higher prices.

What we have currently is a conjuncture of these structural characteristics and circumstances that make it impossible to sustain subsidies at the previous level. Rising imports of diesel, gasoline and gas products at escalating prices cannot be paid for from existing gas revenues. Nor can an already weak state budget—depleted by projects such as a new capital—absorb such rising costs. The only solution is to slash the subsidies and raise fuel prices.

While this may help shed light on the price increases, some intriguing questions remain. one concerns the timing of the move. These pressures have been evident for some time, so why now? Another concern is the magnitude of the price increase. Why such a large increase?

Again, one might speculate on any number of reasons for the timing and size of the price increases. But sources suggest there may be at least one nefarious motive.

For some time, the regime has been considering a privatization of the fuel distribution system in Burma. Under the terms of this, retail outlets for diesel, gasoline and gas products will be sold to a private company. The company would buy fuel products wholesale from the government then sell them to the public for a profit through this retail network. It was rumored that one of the key contenders in this privatization was of course the tycoon, Tayzar, and his Htoo Group of companies.

But there was a problem in this scheme. The profit margin between the wholesale prices paid to the SPDC and the retail price charged to the public was too small. Indeed, under the old subsidized prices, the big money was being made in the black market for fuel and not in the retail outlets. So, to make it profitable for a company to take over the retail system, it would be necessary to raise fuel prices. This would also have the additional benefit of killing off the black market and delivering a monopoly to the company controlling the retail outlets and allowing it to capture the big money.

How far is this true? We may never know. For the moment though, there are crucial political developments flowing from the fuel price increases. Looking longer term, there are also critical questions around the resilience of the energy sector in Burma.
Unless serious attention is paid to developing the sector in areas such as an indigenous refining capacity, the pressures that have been described above will continue to plague the country. Sadly, under a current leadership which seems obsessed with selling off natural resources without further thought, this unfortunately will be the case.

Alfred Oehlers is a security analyst based in Hawaii.