Ghana: Fuel Price Deregulation, Impact of Special Petroleum Tax on Competitive rivalry in Downstream Oil Companies in Ghana

Why some OMCs suddenly cut down their prices?

Does the Special Petroleum Tax  plays a role? Or is a Base Erosion?

Current development within the industry in Ghana gives BDCs and OMCs related companies to take advantage of SPT within the price build up and take the market by storm

The deregulation within the mid/downstream petroleum industry brings on board few interesting development in pricing front line. The Price war has started unabated, not only at the OMCs level but at the BDCs level.

The BDCs need to sell their products through the OMCs. As such, they ought to compete on price to attract the right OMCs. However, real price war is within the OMCs which sell the products to the general public.

In my opinion, those who will survive and make much gain are those who will beat the price war. The question is “can an OMC outsmart the other and reduce its price relatively lower than the other?”. This is possible. And it is more feasible when BDCs and OMCs are related.

In the immediate past, Shell was branded as price leader within the industry. But now, other companies like Allied, Goil, UBI and Frimps, are now the pace setters. For Goil’s price could be linked to government strategy. But rest, the question is why?.

Does the SPT play a role?

So one of the ways a related company can outwit the price war is to take advantage of the SPT 17.5% within the price build up and make gains to compensate for the loss of margin which can result from price reduction at the pump.

Let walk down some numbers below.

The table

Prices from the table shows that, if an OMC reduces its margin by 5%, that will have similar effect on the price. The pump price will reduce by 5% possibly lower than a competitor. Now, if a BDC ( possibly related) invoices OMCs less 5%, subsequently, within the same price window, that will have about 4% reduction on SPT and translates to about Ghc 61,715 gains assuming a lifting of 3m in a month.   Please do not tell me it is a transfer pricing tool.  

From the above, it is clear that OMC will not lose at the pump as the gain on SPT will net off the loss of margin resulting from the price reduction.

Lets look at how the gains/ loss will out play each other.

Assuming the OMC lift 3m lts of super in a month. 5% reduction in the margin will result to about Ghc 41,715 loss. With the gains of Ghc61,715 made on the SPT, the loss in margin is overly  compensated.