Fuel For Growth

Fuel prices have edged downwards over the last few days as the prices of oil come down from an all time high of around USD150 per barrel to a new price in the USD90 per barrel price range.

Of course, the Oil Marketing Companies (OMC’s) seldom bring prices down even when the oil prices go down, but the Government or the Energy Regulation Board (ERB) usually have to intervene to protect the interests of the consumers from the monopolistic fuel pricing mechanism.

The demand for oil based fuels is rising every day and the commodity is quickly being depleted wherever it is found. The logical conclusion is that fuel prices are going to continue to rise for the foreseeable future, until an alternative energy source is found, or new technologies are developed that are not reliant on oil fuels.

It is safe to say that in Zambia we expect fuel prices to go up, and stay up, during at least the next twenty years.

Besides producer prices escalating, what other issues are there affecting oil based fuels, that we may need to consider?

The cost of fuel is impacted by our tax regime which places 40% tax on all imported fuels. This makes our fuel prices one of the highest in the region. The prospect of bringing the taxes down on fuel is rather slim as this is a cash cow for Government revenues. We must be able to offer a compelling argument that would convince Government to reduce the taxes and make up the revenue shortfall from some other revenue generating mechanisms. The simple notion that a reduction in taxes on fuel will lead to more production, thereby generating more business turnover, thus resulting in more taxes being collected in the medium term, is flawed if cheaper fuel leads to higher consumption for leisure and unproductive activities. A well thought out strategy must be developed that convincingly offers a very high probability of success. The strategy would necessarily encompass widening the tax net across all economic activity which is a difficult program to implement considering the poverty levels, un-employment levels, and the vulnerable status of most small to medium enterprises.

Statistics show that the bulk of our fuel consumption is in the Transport Sector which gobbles up 53 percent of imports, followed by the Mining Sector that consumes 27 percent.

A just argument therefore exists for re-designing our Transport and Mining fuel usage, taking into account the current demands, and the future requirements for the next 20 years.

An obvious option is to invest in the Railway Network by rehabilitating the existing lines and expanding the network to major import and export ports at the relevant borders. This upgrade to the Railway Network will remove the necessity for large trucks to transport goods across the country, and in the process, destroying our fragile road network as they currently do today. In addition, many travellers will have the option of travelling by train to major centres around the country, after which they can use various buses to get to the specific locations required. The passenger bus business will continue to grow due to the fact that trains are much slower, they do not make several trips a day to all locations, and the rail network does not cover all cities and towns. The pulling capacity of one train is equivalent to at least 150 large 30 ton trucks and yet the locomotive engine consumes the fuel used by 5 truck engines. The mathematics naturally tells us that the fuel consumption ratio per ton is about 30 times cheaper by train than by trucks. The 53 percent fuel usage could therefore be reduced to around 15 percent, when we consider that cars, light trucks and buses will continue to operate as they currently do, and the numbers will increase over time.

At some point in the future the usage of fuel in our trains could be brought down to zero if we get our electricity generation capacity up to par and electrify our Railway Network.

The Mining industry and other manufacturing processes can be re-focused on another fossil fuel namely; Coal. Zambia has vast reserves of Coal at Maamba and this form of fuel should be our strategic energy advantage. Most of China’s electricity is generated through Coal fired power stations. Much of China’s industry is fuelled by Coal. The Mining industry and other industries can turn to Coal for a sustainable and predictable supply of fuel for their furnaces. The pricing of Coal will be much more stable than oil fuels, and the availability is not only domestic, but also easily accessible along the line of rail.

In addition, the various options for Bio Fuels are available to Zambia. Jatropha and other crops can be grown everywhere in Zambia such that the possibility of small community fuel refineries can be set up to service the local needs of the farmers, businesses and other domestic fuel requirements. This will go a long way towards eliminating Charcoal Burning in the country side that is responsible for environmental degradation in developing countries. The culture of agriculture will be entrenched in all the rural areas thereby leading to national food security and the elimination of hunger.

It may be useful to take a close look at what is happening in the region in respect to fuel pricing strategies. In Zambia we have traditionally kept our petrol at high prices because we argue that petrol is generally consumed by cars for leisure. We have tried to keep the prices of diesel lower than that of petrol on the understanding that diesel is an industrial, commercial, and agriculture fuel that drives the economy. In other neighbouring countries, it is considered that commercial, and industrial activity is profitable thus demanding a higher price for diesel over petrol. It is understood that high petrol prices hurt the consumer whilst higher diesel prices can be borne by businesses. A special distinction is made between the price of diesel for trade and commerce, and the lower price of diesel for agriculture uses. The agriculture diesel is often referred to as Agriculture Fuel for tractors, water pumps, etc. This option for fuel pricing may be useful to consider for Zambia.

In many Asian countries a deliberate effort is made to keep fuel consumption rates as low as possible to reduce the fuel import bill where possible. As such, very low customs duties are levied on motor vehicles that are 1300cc or lower as an incentive to motivate the public to buy and use small cars in their daily lives. The larger engine capacity vehicles attract much higher customs duties, whilst the commercial and industrial vehicles are levied a more reasonable duty rate that encourages investment in the development of industry. This mechanism works towards reducing the fuel consumption for pleasure and leisure activities, but does not compromise the need for heavy vehicles, equipment, and machinery to support economic activity.

There are many discussions that focus on the possibility of Zambia procuring its oil stock from Angola for refining at Indeni Oil Refinery. Too often, the easy answer is that we are not sure of the composition and quality of the Angolan oil, and its suitability to be processed by the Indeni Plant.

When will we stop speculating and do some proper research to clearly identify the suitability of the Angolan oil? Shall we continue to guess on this option or shall we invest in data and information to make the right choices for Zambia? The Angolan crude oil option offers the closest source of oil to Zambia. Initiatives are already underway to rehabilitate and reconstruct the derelict Banguela Railway line that runs from Angola’s Lobito Bay to Zambia’s North Western Province. Local investment is being channelled to building the North Western Railway link that will connect Chingola to the Banguela Railway line. Railway tankers can therefore transport the crude oil from Angola to Indeni in the medium term, and later, a pipeline such as Tazama can be laid between the oil storage farms in Angola and Indeni.

The challenge at Indeni Oil Refinery is to first rehabilitate the plant so that it can process the one million litres design capacity, instead of the current 600,000 litres that is considered maximum. The Tazama oil pipeline can transport over one million litres of feed stock to Indeni to keep the refinery operational continuously. The second challenge at Indeni is to research and asses the upgrade work and investment that will be required to refine Angolan crude oil, if at all possible or feasible. The motivating reason for considering Angolan crude oil is that it will be no more expensive than other suppliers, but the proximity to Zambia will cut down on the transportation costs, thereby making the landed cost of feedstock at Indeni much cheaper than is the current scenario.

In order for Zambia to be stable in fuel supply and to avoid expensive costs of procuring oil feed stocks, refined fuels, and the associated cost of short term finance, we must constantly do ‘Fuel Demand Forecasts’ for the nation. These forecasts will compel us to invest in strategic reserves of both oil feed stocks and refined fuels for periods that will allow the refinery to shut down for maintenance or repairs, without causing massive upheavals in the economy. It is imperative for Zambia to plan for her fuel needs to support and facilitate smooth and sustainable economic growth.

Published 7 October 2008