By: Staff Writer
September 22, Colombo (LNW): The Government is examining legal options to allow private fuel distributors to set their own prices within a specified upper and lower range, signalling a potentially significant shift in Sri Lanka’s fuel-market structure as international oil prices rise and private operators face mounting losses.
Energy Minister Anura Karunathilaka said the proposal is being considered after several private fuel distributors warned that the existing pricing structure was becoming financially unsustainable. The immediate pressure point is diesel, with Lanka IOC, Sinopec and RM Parks reportedly restricting diesel distribution by around 50% because of losses arising from higher global oil costs and the removal of the Government subsidy.
The companies have been lobbying the Ministry of Power and Energy for an urgent price revision, warning that continued losses could eventually threaten the viability of some filling stations.
The crisis exposes a difficult policy dilemma. The Government must protect consumers from sudden fuel-price shocks while simultaneously preventing private distributors from operating at sustained losses. If the latter occurs, reduced supplies could create another form of economic disruption even without an official price increase.
Minister Karunathilaka said the Government will conduct its next monthly fuel-price review at the end of September based on fuel-import costs. However, he acknowledged that fuel prices are already high and questioned whether consumers can absorb another increase.
The situation has become more complicated following the escalation of conflict in the Middle East, which has pushed international oil prices higher after a period during which lower global prices allowed Sri Lanka to pass some savings to consumers.
The proposed import-parity pricing model could therefore represent a major departure from the present approach. Under such a system, private operators would have greater freedom to determine prices according to their actual import costs, while the Government would retain regulatory control through an upper and lower price band.
The proposal also highlights weaknesses in Sri Lanka’s existing cost-reflective pricing formula.
Former CPC Managing Director Professor Prasanna Perera of the University of Peradeniya has repeatedly argued that administrative controls cannot replace sound market fundamentals. He has also warned that pricing formulas can become ineffective when political and social considerations delay necessary adjustments.
The consequences can move in two directions: hidden subsidies when prices are kept below economic costs, or abrupt increases when accumulated losses eventually have to be corrected.
That problem is particularly serious for the CPC because Sri Lanka’s fiscal position leaves limited room for the State to absorb large fuel-market losses.
Private distributors, meanwhile, have a different financial structure. Sinopec, LIOC and RM Parks can utilise their own foreign-exchange resources to import fuel, potentially reducing pressure on the Central Bank.
Hitherto liberalisation carries its own risks. Without strong monitoring, price flexibility could increase volatility and create differences between suppliers.
The Government is therefore confronting a fundamental question: whether Sri Lanka’s fuel market can move towards greater competition without transferring excessive costs to already pressured consumers.