If, right now, you could drive from one refuelling station to another up and down the country, you would experience a curious mix of outcomes in respect of the availability of petrol. Increasingly, service stations are managing to stock up and supply diesel without issue, but when it comes to petrol, the situation is rather murky. It’s becoming apparent that a shortage of petrol is emerging in Zambia and this crisis is deepening day after day.
But here is the thing: there is no known shortage of petrol globally, or in the region. So, why should Zambia be experiencing shortages of this crucial commodity right now? Like diesel, petrol is one of the most critical inputs into the Zambian economic machine, as is the case with any other country. Apart from the potential for social unrest and political tensions that fuel scarcity can create, its likely impact on the economy cannot be underestimated. So why is Zambia going through a phase of petrol shortages?
If you sat down for a cosy heart-to-heart with Mr. Fadi Mitri and Mr. Patricio Chababo – as this writer did – you would come away with the clear conviction that you had just met with two gentlemen who have their fingers on the pulse of this worrying development. And those gentlemen should know what they are talking about. Mr. Mitri is the Head of Africa at Puma Energy and Mr. Chababo is the Managing Director of Puma Energy Zambia. Apart from the technical knowledge of the supply-side dynamics of the oil industry, which comes as part of their day-jobs, Mr. Mitri and Mr. Chababo have a thorough and in-depth understanding of the mechanics of Zambia’s fuel economics, and they are more than happy to share their insights.
The Primary Threat to the Security of Supply of Fuel Energy in Zambia
You would expect that the insights to be gained from the two gentlemen would be based on some deeply esoteric, insider knowledge, too complicated for laypersons. You might be forgiven for thinking like that, given the high-profile nature of Mr. Mitri’s and Mr. Chababo’s official positions and the size and perceived complexity of the oil industry. If that was your thinking, however, you would be disappointed. The explanation for Zambia’s current petrol shortages is something as simple as daily bread-and-butter issues. The same bread-and-butter issues also explain why diesel supply has gradually been stabilising over time whilst petrol seems to be squeezing through a particularly throttling bottleneck.
It all comes down to price, or something Fadi Mitri delightfully refers to as ‘Import Price Parity.’ Parity implies equality between two or more elements. Mr. Mitri maintains that there is clear disparity between the components of cost that make up the landed cost of oil and related products when purchased in international markets and the components of cost that are taken into account when deciding the compulsory cost at the pump. Import Price Parity requires that when deciding the enforced fuel pump-price, the authorities must consider all the elements of cost borne by the Oil Marketing Companies (OMCs) when they import oil.
The Zambian government has transitioned away from participating in fuel procurement, allowing the private sector to drive supply in Zambia. Any licensed entity can import fuel, as importation is open to all players. The Puma leadership view this reform in the national fuel procurement system as a bold and positive move by the government.
The move has already delivered positive benefits to the country, especially in the sense of fiscal stability. During 2022, Zambia was able to navigate its way through very volatile international markets and escape the supply insecurities that afflicted the rest of Africa, caused primarily by the war in Ukraine. This was largely because the government relied on the services of the OMCs to keep the market supplied, as the OMC were able to adapt and react quickly to align with the changing market dynamics. In that sense, the move by government to empower OMCs to act independently on the supply-side, combined with a healthy mechanism for adjusting the local prices to match international market prices, enabled government to enhance economic stability, avoiding ballooning government debt and creating a more transparent and efficient procurement process for fuels.
The Zambian petroleum market operates under regulatory measures, where the Energy Regulation Board (ERB) sets the monthly pump prices based on the prevailing international price, different cost elements in the supply chain and foreign exchange rate movements. For the months of May, June and July 2023, the petrol prices set by the ERB were severely understated. It seems obvious that the ERB did not take the full cost of petrol imports into account. For some of those months, this was exacerbated by sudden fluctuations in foreign exchange rates, making importation economically unviable.
“There are no miracles here,” Mr. Mitri says. “If the regulated prices do not allow for an economic import model, there will be reduced imports, or no imports at all.” That means, if the price at which the OMCs are required to sell fuel energy is less than the cost to the OMCs to bring the fuel products to the pump, it does not present an attractive business proposition to the OMCs. As a result, OMCs will be reluctant to supply, and that inevitably results in shortages. “The challenge that the country is facing right now is that the price at the pumps on the streets today is below the level that would be required to buy the product from Dar-es-Salaam, or from Beira, or from any port,” Mr. Mitri added.
Mr. Chababo was quick to chime in with a remark that drove the point home. “If the selling price of petrol allows the importer to expect and forecast a profit,” he said, “Importers would readily engage in the importation process. Conversely, if the selling price would result in financial losses, no importer would be willing to incur those losses by importing and selling at a negative margin.” Mr. Chababo added that the consequence of such a dynamic would be a gradual deterioration of the country petrol stocks. “Security of supply requires both a transparent, efficient fuel procurement system and consistent, predictable implementation of pricing mechanisms aligned with international markets.”
But wait a minute; how come petrol is so negatively affected and not diesel? What is so special about diesel?
The Components of Costs of Supply of Fuel Oil
The cost of an oil product has many components. These components include the product cost borne by the producers and refineries, the cost of transportation of the product, plus a margin for the OMC or retailer. Transportation costs include transfers from refineries to the outbound shores, from the outbound shores to the inbound shores, from the inbound shores to depots inside Zambia and from the depots to the retail stations. After deducting all their costs from the pump-price, OMCs typically experience margins of around 3% of the selling price or less.
Petrol and diesel imported into Zambia have very different transportation systems. Diesel is typically refined in the Arabian gulf, shipped to Dar-es-Salaam, Tanzania, and transported from Dar-es-Salaam to the inland port of Kapiri Mposhi via the TAZAMA pipeline. On the other hand, petrol is transported by road, primarily from the port of Beira, Mozambique. On the hierarchy of costs associated with different transportation systems, road transport by truck is one of the most expensive (about $220 per metric tonne) whilst pipeline transport is one of the cheapest (about $49 per metric tonne).
This means although the last mile of transport of diesel is by road, the effect of pipeline transfer to Kapiri Mposhi results in diesel still being cheaper to import into Zambia than petrol.
Puma view the conversion of the Dar-es-Salaam–Ndola pipeline from transporting crude oil to a pipeline for refined, clean products was a major achievement of the Government of Zambia. The current use of the pipeline, through which the bulk of Zambia’s diesel is transported, has already brought positive benefits to the diesel market. It has helped reduce the landed cost of diesel in Zambia, allows for faster delivery of the product from import terminals to end customers and significantly reduces the safety and environmental risk of transporting fuels by road.
The Effect of Current Price Regulation on the Zambian Fuel Market
OMCs in Zambia are reducing petrol supply due to lean profit margins caused by high landing costs compared to the retail prices set by the ERB. The high cost of transporting petrol by road is making it unattractive to bring the product into the country because it is increasingly difficult for OMCs to import petrol economically.
Petrol supply has become erratic, with some OMCs withdrawing or holding back on supply due to discouraging profit margins. A number of fuelling stations in Lusaka have had no petrol for days, if not weeks. The current petrol shortage can, therefore, be attributed directly to lean margins and high transport costs, which are unappealing from a business point of view.
At the beginning of June there were diesel supply constraints in certain important productive sectors of the economy such as transport, agriculture and construction. There were also signs of scarcity in some retail service stations. This was primarily caused by the fact that the wholesale price offered by OMCs supplying diesel through the Dar-es-Salaam–Ndola pipeline was higher than the ERB regulated price. As a consequence, OMCs could not purchase diesel on these terms, because customers would not accept to buy diesel above the regulated price. A prompt intervention of the Energy Regulation Board regularised this situation leading to a normalization of the supply of diesel in the country.
Mr. Mitri and Mr. Chababo emphasized that Energy Regulation Board has actively been engaging Puma and other OMCs to address the issue of looming shortages of petrol in the country. It seems obvious that having a strong regulator who maintains a healthy relationship with OMCs is a key factor to working out and reaching solutions to fix and normalise this kind of situation in the very short term.
Mr. Mitri emphasized the fact that the government has wisely opted to step out of the fuel import market. However, when a market has regulated prices, as our market is, and the price at the pump does not reflect import parity and the real cost to serve, fuel shortages are bound to occur. Mr. Mitri posed a rhetorical question: “How can one explain that the price of petrol is lower in Zambia than in Malawi, Zimbabwe or Mozambique?” He explained that this situation reveals that, in the months of May and June 2023, the price methodology to set the price at the pump failed compared to the more consistent implementation during the year 2022, a year in which episodes of fuel-supply shortages were isolated. “The solution to this must surely be a robust and predictable fuel pricing methodology, or a full deregulation of prices, as is the case in countries such as Ghana,” Mr. Mitri concluded.
To alleviate the petrol shortages being experienced in Zambia currently, the government needs to adopt realistic pricing models which take into account the full cost of import (i.e., Import Price Parity), and to encourage investing in mass oil transportation systems notably pipelines both international and national. Investment in midstream and transport infrastructure along key energy corridors in Zambia and its neighbouring countries will be crucial in ensuring affordable energy security in the near and long term.
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