Fuel price cap sparks imbalance

Major fiscal imbalances are occurring in Burma as the market adjusts to the new prominence of private fuel stations.

Key to the problem is the 2,500 kyat ($US2.80) per gallon price cap artificially placed on fuel sales; a little over half of the more than $US4 per gallon for unleaded petrol in neighbouring Thailand.

Burma economics expert Sean Turnell told DVB that gas prices determined by the state will inevitably cause problems. “If the state is going to determine the price, it doesn’t really matter if the fuel outlets are owned by the government or the private sector – you still have not got a market-determined price and if you haven’t got a market-determined price, you haven’t got a balance between supply and demand.”

Whilst many private filling stations are owned by large domestic conglomerates such as Htoo Trading or Max Myanmar, they have to buy the fuel from the government at around $US2.60 and sell it at the artificially-capped rate of $US2.80.

The $US0.20 margins are so small that the incentive to sell fuel is diminished, as are the profits needed to expand. This means that there is little money to buy assets such as new filling stations in more remote areas.

“If you’ve got a margin of less than five percent, then that’s nothing,” said Turnell. “How would you possibly recoup labour costs, rent costs or increase of capital costs or anything? That’s a certain loss-maker.”

The executive director of Htoo Trading, U Min Swe Oo, told the Myanmar Times in May that “[the private filling stations] will be a great challenge for businesspeople and creates many options for customers”. Indeed now customers will have to search for the cheapest prices on the black market, given the likelihood of filling stations running out of fuel or the lengthy queues they have faced since the recent introduction of a three-gallon limit on each fuel purchase.

Moreover, the challenge of turning a profit and meeting demand from disparate customers is likely to push retailers toward the black market, a sector that the recent mass privatisation had hoped to eliminate.

Fuel prices in rural areas or small towns in Burma are often significantly higher than urban areas because there are no local filling stations. Furthermore, private business has no interest in setting up shop there given the small profit margins available in the official sector, and the smaller demand in less affluent areas.

Thus private individuals in search of an income fill this void by buying the maximum capacity from fuel stations in urban areas such as Rangoon, and selling it on at inflated prices. Burmese economist Aung Thu Nyein confirmed that, “The private pumps are smuggling out their fuel to the black market”.

The Weekly Eleven magazine reported that black market prices in one small town in Arakan state were hovering between 4000 and 5000 kyat ($US4.50 to $US5.50) per gallon, close to the price of neighbouring Thailand.

The government’s artificial price is capped partly to prevent social unrest, as seen in September 2007, but the country has to import around 23,000 barrels of refined fuel a day. Unlike richer countries, Burma does not have the means to refine oil, and thus is forced to purchase the more expensive processed version.

The government is largely responsible for the import of fuel, and with the extent of black market profiteering, it is hard for the government to respond adequately to demand, leading to inevitable shortfalls.

The fuel sector is therefore caught between the inflexibility of the government’s price cap and role in importing the commodity from regional countries, and the lack of incentives that the private sector now has in distribution. Privatised fuel stations are meanwhile reduced to a veneer where the lack of profitability makes every part of the retail chain an accessory of the black market.

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