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Wednesday, November 23, 2011

Price Controls - Failures Abound in the Fuel Sector

The populists in GoK and Parliament decided that Price Controls is the way to go... then did (as usual) a half-assed job...

Well, selective Price Controls do not work. They create problems for the Taxpayer at large. They create Rent-seeking. They create inefficiencies & a taxpayer funded bureacracy.

As you know (see prior blogpost here) Interest Rates have jumped to 24% or higher for many Borrowers including OMCs. What a pity the ERC is playing populist politics...

The energy sector regulator, however, declined to give an indication of the margin by which the next adjustment will increase fuel costs, saying the oil marketers “will not be allowed to pass on the lending cost increases in full.”

So who bears the cost???

So whereas Banks (some whose owners/shareholders are either powerful politicians or very well connected) are not under any sort of Price Control regime... Basically, the populist Mandarins at the ERC are saying... "Let the banks make super-profits"

  • 8-10% spreads over CBR
  • Spreads of 1-5% for forex

but we want you the (legitimate) risk-taking OMC who invests billions in infrastructure to go BROKE... Of course, the Briefcase Dealers are doing a-OK...

As I have argued in the past, many OMCs will STOP importing fuel for the Wholesale Sector. A consevative OMC will import only that product/s it can quickly move through its own sales channel without giving/extending credit to anyone.

The (competitive) Free Market will be killed off as many smaller retailers rely on credit but at 24% (or higher) they cannot afford to absorb the financing costs associated with storage. The OMCs who import and distribute fuel (KenolKobil, Shell, Total, etc) will stop extending credit to the Retailers. In essence, 'trading' will slow down to a crawl.

Bottomline: Price Controls are bad and selective Price Controls create rent-seeking. I expect to see fuel shortages as the norm in some areas serviced by small/independent Retailers as OMCs will not import more than they can sell through their own channels to cut financing costs. The 'distant' areas with mostly Independents will see a thriving black market in fuels.

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