Deregulation of the Petroleum Sector – Part 1

Galveston, UNITED STATES:  An oil refinery is pictured 22 September 2005 on Galveston Bay in Texas City, TX. Hurricane Rita threatens a large portion of the US oil and gas operations industry in the Gulf of Mexico and along the Texas coast just weeks after a devastating blow to the sector from Katrina. Oil producers and refiners were attempting to secure their facilities in the face of a storm that threatens about 27.5 percent of the industry, said Red Cavaney, president of the American Petroleum Institute.   AFP PHOTO/Robert SULLIVAN  (Photo credit should read ROBERT SULLIVAN/AFP/Getty Images)
Photo credit: Robert Sullivan/AFP/Getty Images

Over the years, there has been consistent discussion on the divisive subject of deregulation of the petroleum sector. The debate has raged between economists and non-economists, and academics and non-academics alike. Finally though, it appears proponents for full deregulation have won. The government has given clear indication of its intentions to adopt it as policy in the very nearest future. I have accordingly also decided to wade into this contentious debate.

This piece marks the first of a three part series that seeks to throw some light on the subject and ultimately avert our minds to the nitty-gritties we need to know about deregulation. Accordingly, I am going to detach myself from any opinionated attachment to either side of this debate. I will attempt to present arguments for and against deregulation in the second and third parts of this series.

Understanding Deregulation

A little economics to get us underway

Monopoly is a well-known concept that requires little elucidation. Economic theory has it that a profit-maximizing monopolist will set their price at the point where marginal cost (MC) intersect marginal revenue (MR). Given that the monopolist faces a downward sloping demand curve, price is greater than MR i.e. the price paid by the consumer is greater under monopoly than in a competitive market. Theory has also shown that monopolist may choose factors of production inefficiently and thus be operating in the inefficient point of the production possibility frontier.

Away from the economics and back to the real world

In Ghana and like many other countries within and outside Sub-Sahara Africa, the petroleum sector is controlled by a government backed monopolist. Before deregulation, the Tema Oil Refinery (TOR) was solely responsible for the importation of crude and petroleum products and based on TOR’s costs, levies and market margins, government sets retail prices. In this system, Oil Marketing Companies (OMCs) only distributed petroleum products refined or imported by TOR at prices set by government.

Deregulation

Investopedia defines deregulation as “the reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry”. From practice, deregulation has been noted to have three fundamental features.

1. There is an open tender process through which any company can import crude oil and/or petroleum products. Thus in Ghana, OMCs will be permitted to import crude and its products.

2. Companies are permitted to fix retail prices albeit following some form of formula (automatically adjusted). Ghana government will seize to be the one setting retail prices. The main catch here is full cost recovery including taxes and levies.

3. An independent entity supervises the pricing system. This transparent body is expected to draw representation from stakeholders including government. The essence of this entity is to promulgate guidelines to regulate OMC prices.

NB. It does not control prices.

End of first part.