Wednesday, January 14, 2009

When the Market Speaks


(Irrawaddy News) -The sharp fall in oil prices on world markets has created a unique situation in Burma, where the cost of fuel on the black market is now lower than at government-controlled pumps.

Until the recent precipitous fall in world oil prices, the government was cashing in by rationing fixed-price fuel at state-run pumps while also attempting to control the flow of gasoline and diesel on the black market.

The sudden drop in world market prices by more than half has turned the system upside down. Today, the black market price for a gallon of gasoline is 300 kyat (US $0.27) lower than the 2,500 kyat ($2.20) charged at government-run pumps, while diesel is 400 kyat ($0.35) cheaper than the official price of 3,000 kyat ($2.70).

The official price of gasoline and diesel had remained unchanged since sharp increases at the state-run pumps sparked the demonstrations that led to the September 2007 uprising.

Burma’s “black” economy controls everyday life, where consumers contend with differences between state-decreed prices and black market rates for many basics, particularly fuel.

The military took advantage of the situation by selling to the black market while keeping rationing. Ordinary citizens are allowed only two gallons (nine liters) a day and often have to queue for hours at the pumps. Black market sources, on the other hand, were readily accessible—although at a price—and many found a handy means of income by dealing in this dark side of the Burmese economy.

Trapped in a spiral of rising costs by having to buy fuel on the international market in dollars and then selling it in the local currency, kyat, the regime’s Ministry of Energy dropped its subsidy on pump prices in 2007.

The junta undertook a partial "liberalization" of Burma’s energy market by allowing Myanmar Economic Holding, Ltd, which is owned by the military, and Htoo Trading Co, Ltd, which belongs to Tay Za, a close associate of leading figures in the ruling junta, to import fuel.

When oil prices on world markets hit $100 a barrel in early 2008, the regime again tried to control fuel sales. In May 2008, black market prices spiked at 7,000 kyat ($6.20) for a gallon of diesel and 6,000 kyat ($5.30) for gasoline.

In response to the impact on businesses, the regime authorized the formation of a “diesel committee” to ensure that companies operating heavy equipment had adequate access to fuel at reasonable prices. The committee, at that time, set the price of gasoline at 4,500-5,000 kyat ($4.00-4.40) a gallon and diesel at 4,600-5,200 kyat ($4.10-4.60).

Along with a dramatic decline in world oil prices in recent months, according to business sources in Burma, large amounts of lower-priced fuel are being smuggled into the country from China, India and Thailand, making it additionally difficult for the military to reap profits from its own artificially created black market.

Pressure is now increasing on the Burmese regime to free the country's fuel market from government price-control.

That should be a good news. Declining energy prices should lower other living costs and provide some much-needed relief to consumers.

Traditionally, the regime has shown little understanding of the dynamics of a market economy, looking instead only at short-term problem-solving. Now the market is starting to speak loudly—and this time the regime has to listen.

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