Fuel Prices Significantly Affecting The Cost Of Living

Introduction

Fuel pricing plays a critical role in shaping the economic landscape of any country, and Ghana is no exception. As a key input cost, fluctuations in fuel prices can significantly impact the cost of goods and services, influencing inflation rates and the overall cost of living.

In Ghana, fuel prices are influenced by a variety of factors including global oil prices, currency exchange rates, taxes, and levies imposed by the government. The ripple effects of changes in fuel prices are felt across various sectors, affecting transportation costs, production expenses, and ultimately, consumer prices.

The objectives of this analysis are to examine the historical trends in fuel prices in Ghana, particularly for petrol and diesel, and to understand the nominal changes in prices across periods.

Additionally, the analysis aims to highlight the impact of these price changes on the cost of living and the operational costs for businesses, offering insights into potential policy measures that could mitigate adverse effects and ensure economic stability ultimately contributing to informed decision-making and strategic planning.

HISTORICAL CONTEXT OF FUEL PRICES IN GHANA

The historical trajectory of fuel prices in Ghana reflects a complex interplay of both global and domestic factors. Over the past few decades, Ghana has experienced significant fluctuations in fuel prices, marked by periods of sharp increases and occasional decreases. These changes have had profound implications for the economy, affecting transportation costs, production expenses, and the overall cost of living.

Factors Influencing Fuel Prices

Understanding the trends in fuel prices requires an examination of the key factors that influence these changes. These factors include global oil prices, taxes, levies and margins, subsidies,  andexchange rates,

Global Oil Prices: The global oil market plays a critical role in determining fuel prices in Ghana. Fluctuations in the price of crude oil on the international market directly impact the cost of refined petroleum products.

Events such as geopolitical tensions, changes in production levels by major oil-producing countries and shifts in global demand and supply dynamics can lead to significant changes in oil prices. Ghana imports refined crude and becomes a price taker on the international market. This is an external factor that government do not have control over.

Taxes, Levies and Margins: The Ghanaian government imposes various taxes and levies on fuel, which constitute a substantial portion of the final retail price. These taxes and levies are intended to generate revenue for the state, fund infrastructure projects, and support other public services.The margins also cover operational and distributional costs.

Some of the taxes and levies include the Special Petroleum tax (GHS 46p), Road fund levy (GHS 48p), Energy debt recovery levy (GHS 49p), Energy fund levy (GHS 1p), Price stabilization and recovery levy (GHS 16p). Recently, othernew levies introduced include the sanitation and pollution levy (GHS 10p), and Energy sector recovery levy (20p), Uniform Petroleum Price Fund (GHS 90p).

The margins include BOST margin (GHS 12p), Fuel marking margin (GHS 9p), Primary Distribution margin (GHS 26p).(PBU TEMPLATE, n.d.). All these factors are considered in the price build up on fuel. However, high tax rates can contribute to elevated fuel prices, increasing the financial burden on consumers and businesses.

Subsidies: In some periods before 2014, the government has implemented fuel subsidies to cushion consumers from high global oil prices. These subsidies are designed to keep fuel prices artificially low, making them more affordable for the general population. However, subsidies can strain government finances and are often unsustainable in the long term.

Therefore, in June 2015, the Government of Ghana implemented a deregulation policy aimed at enabling marketers and importers of petroleum products to sell directly to consumers at prices set by themselves.

The p objective of the policy was to eliminate government subsidies on petroleum products, which were largely driven by exchange rate losses and consumer subsidies(Acheampong & Ackah, 2015).

Exchange Rates: The value of the Ghanaian cedi against major foreign currencies, particularly the US dollar, significantly influences fuel prices. Since Ghana imports a large portion of its refined petroleum products, a depreciation of the cedi makes these imports more expensive, leading to higher fuel prices domestically.

This factor significantly features any time fuel prices are announced. The National Petroleum Authority which is the regulator of fuel prices will publish the exchange rate of that pricing window.

CURRENT SITUATION

In recent years, thus from 2021, one can realize that fuel prices have taken a nosedive. A significant jump from a gallon price of 26 GHS to the present figure of 61.74 GHS and 64.74 GHS respectively. This current figure is what has raised eyebrows so at what is the causative agent of this phenomenon.

These price fluctuations have been influenced by both global and domestic factors. As of mid-2024, the price of petrol has surged to 61.74 GHS per gallon, while diesel has reached 64.17 GHS per gallon.

The increases represent a dramatic rise from the prices in previous years, continuing the trend observed since 2016 when petrol and diesel were priced at 15.03 GHS and 15.975 GHS per gallon, respectively.After the full deregulation of the petroleum downstream stream sector, prices are not controlled directly by government. From 2021, prices of fuel have on an astronomical high level.

This led to the setting up of Gold for Oil policyto contain forex pressures and stabilize fuel prices. The real impact for Gold for Oil has not been felt as it has insignificantly controlled prices considering the period it was introduced and comparing it to price changes of brent on the international market.

The table below shows the annual average price of Petrol and Diesel per gallon from 2009 to first pricing window of July 2024.

ANALYSIS OF PRICE CHANGES

From 2009 to 2016, the prices of both petrol and diesel in Ghana saw some level of increases. Petrol prices went up by 234%, rising from 4.5 GHS per gallon in 2009 to 15.03 GHS per gallon in 2016. Diesel prices followed a similar trajectory, with an increase of 248%, climbing from 4.59 GHS per gallon in 2009 to 15.97 GHS per gallon in 2016.

In nominal terms,Petrol prices rose by 10.53 GHS per gallon, climbing from 4.5 GHS per gallon in 2009 to 15.03 GHS per gallon in 2016 and Diesel with an increase of 11.38 GHS per gallon, rising from 4.59 GHS per gallon in 2009 to 15.975 GHS per gallon in 2016.This period was marked by significant economic challenges, including currency depreciation, incresed inflation rates, and global oil price volatility, all contributing to the steep rise in fuel costs.

The period from 2016 to 2024 witnessed even steeper increases in fuel prices. Petrol prices further surged by 310%, jumping from 15.03 GHS per gallon in 2016 to 61.74 GHS per gallon in 2024. Diesel prices similarly skyrocketed by 301%, increasing from 15.97 GHS per gallon in 2016 to 64.17 GHS per gallon in 2024.

In nominal terms, Petrol prices rose by 46.71 GHS per gallon, jumping from 15.03 GHS per gallon in 2016 to 61.74 GHS per gallon in 2024 and Diesel saw 48.19 GHS per gallon increase, thus from 15.975 GHS per gallon in 2016 to 64.17 GHS per gallon in 2024.

This reflects excalating economic pressures, increased taxes and introduction of new taxes, as well as increased margins on fuel. Considering the substantial nominal price changes under this period, these hugely influenced directly and indirectly the prices of goods and services thereby contributing to the increased cost of living and economic hardships.

IMPACT OF FUEL PRICES ON THE COST OF LIVING

The substantial rise in fuel prices has had far-reaching effects on the Ghanaian economy. The increased cost of petrol and diesel directly impacts transportation costs, which in turn affects the prices of goods and services.

For consumers, this translates to a higher cost of living, as everyday expenses such as food, transportation, and utilities become more expensive. For businesses, that make use of these petroleum products have the potential to increase their production costs anytime fuel price increases.

The increased operating costs can squeeze profit margins, potentially leading to higher prices for consumers or cost-cutting measures that could impact service quality or where they cannot cope, they reduce employment. Every two weeks, petroleum consumers are praying for stability in fuel prices or in anticipation for reduced prices.

They get the shock of their liveswhen there is announcement of fuel price increment just because of its direct relationship to affect prices of goods and services. Few times have consumers experienced a reduction in fuel prices.

RISING FUEL PRICES AND THE COST OF LIVING.

Several factors influence the cost of living in Ghana, including inflation, unemployment rates, household income, and the cost of basic necessities among others. Inflation, which measures the rate at which the general level of prices for goods and services rises, directly impacts purchasing power and the cost of living.

As the prices of fuel increase, it translates into increased prices of goods and services reflecting in increased inflation rates known as cost-push inflation. High unemployment rates can lead to lower household incomes, reducing consumers’ ability to afford goods and services.

Increasing fuel prices erode household income by raising transportation costs which can lead to higher prices for food and other essential goods that need to be transported and other daily expenses.

When families spend more on fuel, they have less disposable income for other needs, which can lead to financial stress and a lower standard of living. Crude oil prices have a negative and significant impact on economic welfare (Kamasa, 2020)

GOVERNMENT AND POLICY RESPONSES EFFECTIVENESS

The Government of Ghana has implemented some measures to address the rising fuel prices with a major target of controlling forex pressures. Among these measures are the “Gold for Oil” policy and Dollar auctioning to Bulk Oil Distributing Companies (BDCs). The “Gold for Oil” policy was announced in November 2023 to gradually phase off. In April 2024, the governor of the Bank of Ghana had suggested that the “Gold for Oil” policy must continue.

The Bank of Ghana continues to auction dollars to the BDCs. The amount targeted is $120million as against the monthly petroleum consumption bill of 450 million dollars translating to about 26%(BoG to Auction $120m to BDCs in Quarter 2, 2024 – MyJoyOnline, 2024). This means that, there must be more concerted efforts to increase the dollar for the BDCs.

The combined effect of these polices is that, cumulatively, fuel prices continue to increase despite these interventions hence not reflecting the real impact expected of these policies.  According to Awal (2024), the Gold for Oil (G4O) program in Ghana has demonstrated a significant positive impact on fuel prices and broader economic indicators, supporting its continuation.

But this stability he wants to ascribe to this policy is largely because on the international front, prices of these fuel products have seen major decline. Ghana could not have influenced international market prices. It would have been more impactful if the price on the international market keeps rising whiles Ghanaians experience a reduction in prices at the various pumps.

THE WAY FORWARD

The government and policymakers must focus on factors within their control and implement necessary measures to address the fuel price issue. Instead of relying heavily on imported refined products, there should be concerted efforts to revive the Tema Oil Refinery (TOR).

This revival would create jobs, stabilize the currency, and ensure fuel security(Revive TOR to Reduce Oil Imports – IES, 2023). Additionally, the Bulk Oil Storage and Transportation Company Limited (BOST) must be repositioned to maintain strategic reserves for the state, a responsibility it has neglected.

A thorough review of the taxes and margins in the price buildup is essential, with the removal of unnecessary charges.Furthermore, government policies and programs should be robust enough to ensure currency stability instead of the ad hoc forex management.

CONCLUSION

Ensuring stable and affordable fuel prices is crucial for the economic well-being of both consumers and businesses in Ghana. There is a direct and relationships between fuel prices and cost of living. The steep increases in fuel prices highlight the need for sustainable energy policies and economic strategies to manage the impact on the cost of living.

Xatse Derick Emmanuel

Research and Policy Analyst

Institute for Energy Security-IES

&

Nana Amoasi V11

Executive Director

Institute for Energy Security-IES

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