Shortage Of Petroleum Products Economics Essay

Recent discovery of oil and gas in Ghana in commercial quantities has given the nation hope in promoting economic development. The nation at the moment is putting in place the necessary legislative and institutional reforms to ensure efficient use of resources from the oil find. Ghana’s quest to meet its development agenda is guided by the vision 2020 policy document with the objective to attain a middle income status by 2015. Another major policy initiative is to meet the millennium development goals by 2015. Efforts at reaching these targets have proven quiet challenging.

The rate of population growth in Ghana is gradually increasing with an average intercensal growth rate of 2.5% from 2000-2010. [1] The population of the country is projected to double in size in 28 years. [2] Currently the population of Ghana stands at about 24million and is expected to double by 2020. Increase in population will consequently result in an increase in the demand for energy to fuel the economy and for that matter the demand for petroleum products.

A goal under the energy policy document for the downstream is to “facilitate the universal access to adequate, reliable and cost effective petroleum products such as Liquefied petroleum gas (LPG).” [3] The focus of the study is primarily on the major petroleum products in high demand namely; Gasoline, diesel, LPG and kerosene.

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Hence, this paper seeks to make projections for petroleum products by 2015. The outcome of the research is expected to provide a forecast of the situation to policy makers in the petro-chemical industry and the necessary interventions for future planning.

1.1 JUSTIFICATION FOR THE STUDY

The shortage of petroleum products in Ghana is one of the key challenges facing the petro-chemical industry. The nation has been challenged with frequent shortages of petroleum products especially LPG in recent years. This problem generated from most commercial transport owners converting their vehicles engines into using LPG which they consider much affordable to petrol and diesel. Demand for LPG is projected to stand at 250,000-300,000 tonnes yearly as a result of its high demand in the transportation and domestic sector. [4] 

Currently at the time of this research, there has been a shortage in supply of petroleum products in the country and the only available product for motorist is unleaded fuel which cost 2.4 cedis per litre as against 1.7 cedis for regular petrol. [5] 

Another major setback confronting the petroleum industry is inadequate refining capacity and insufficient storage infrastructure. [6] The projected annual growth rate for petroleum products is anticipated to increase from 1.62 million tonnes to 2.49 million tonnes by 2015. [7] 

As a result of the noted challenges, this paper seeks to forecast for future demand of petroleum products by 2015 and the need for government preparedness to counter demand and the current challenges at hand.

Figure 1: SHORTAGE OF PETROLEUM PRODUCTS

Shortage Of Fuel Cues

Source: Joy Online, 2013.

The Figure above shows the recent shortage of petroleum products on the Ghanaian market creating long queues and destruction in business activities.

2. REVIEW OF LITERATURE ON ENERGY DEMAND FORECASTING

This chapter identifies existing literature on energy demand forecasting methods and conclusions drawn from the various studies.

2.1 EMPERICAL STUDIES

Ghosh, projected for future demand of petroleum products in India using cointegration and error-correction modelling approach from 1970-1971 to 2001-2002. His forecast was to study the long-run equilibrium relationship between economic growth and total consumption of petroleum products. The outcome of his research revealed that the series were co-integrated and the long-run elasticity of demand for petroleum products was projected.

He further went on to forecast for middle distillates and total demand for petroleum products from 2011-2012. The results from the forecast provided the need for investment in the Indian refinery industry. [8] 

Ibrahim and Hurst studied the factors contributing to the pattern and level of energy demand in oil importing and exporting countries using aggregate oil and energy demand models. The results from their study pointed out a strong relationship between aggregate energy demand and income. [9] 

Chai et al forecasted the demand for petroleum product consumption in the Chinese transportation industry based on the Bayesian linear regression theory and Markov Chain Monte Carlo method (MCMC). They established a demand-forecast model of petrol and diesel consumption introduced into the analytical framework, with explanatory variables of urbanisation level, per capita GDP, turnover of passengers (freight) in aggregate (TPA, TFA), and civilian vehicle number (CVN). The forecast   was undertaken between the period (2011-2015) based on the historical data covering 1985 to 2009. They concluded that urbanization is the most sensitive factor, with a strong marginal effect on petrol and diesel consumption in the transportation sector. [10] 

Parikh et al. forecasted the demand for petroleum products from 2011-2012 using econometric models based on different petroleum products. The study was carried under two scenarios of low and high gross domestic product (GDP) growth. The outcome of their study provided an insight for the Indian government on the investment decisions in the oil and gas industry to enable them attain GDP growth as anticipated in the future. [11] 

Cheze et al. projected the demand for fuel oil from 2008-2025 using scenario design for the air transport sector. Their research concluded on a 100% increase in air transportation with an annual growth of 4.7% indicating an increase in demand for fuel oil by 38% with 1.9% annual growth.

3. OVERVIEW OF THE PETROLUEM SECTOR IN GHANA

The petroleum sector comprises of the upstream, midstream and downstream. Activities in these sectors involve exploration, production, transportation and marketing of petroleum products. Major products traded include premium gasoline, gas oil, and residual fuel oil, LPG and Premix. About 30% of the products are imported and the remaining 70% refined locally by TOR. [12] 

3.1 DEMAND FOR PETROLEUM PRODUCTS IN GHANA

The demand for petroleum products has been increasing over the years. This may be attributed to annual increase in population and economic growth. In 2011, the total petroleum products consumed was about 2.8 million tonnes. [13] 

Figure 2: CONSUMPTION OF PETROLEUM PRODUCTS FROM: 2000-2011

Source: Compiled by Author using NPA Data Ghana, 2012.

From figure 2, consumption of petroleum products fell in 2010 and began to rise in 2011. The fall may be attributed to the technical hitch at the TOR resulting from the pumping of sea water into the boilers causing damage to residual fluid Catalytic cracker and the crude distribution unit (CDU) leading to the closure of the facility for almost two weeks. [14] 

3.2 IMPORT AND EXPORT OF PETROLUEM PRODUCTS IN GHANA

In 2011, the total petroleum products imported was approximately 2.1 million tonnes and products exported stood at 665,900 tonnes. [15] Ghana is a major importer of crude from Nigeria. The total imported refined petroleum products for year 2000-2010 was about 259 (000, barrels). [16] Ghana is a major importer of crude from Nigeria. The country imported about 10 billion barrels of crude for refinery operations and electricity generation in 2011. [17] 

Figure 3: IMPORT AND EXPORT OF PETROLUEM PRODUCTS: (2000-2011)

Source: Compiled by Author using data from Tema Oil Refinery, 2012.

From figure 2, import of petroleum products increased in 2011. This was as a result of increase in petroleum products imported from Nigeria worth $113 million dollars compared to total import worth $81.76 dollars in 2010. [18] Export of petroleum products began to rise immediately after 2007. This may be attributed to start of crude production in commercial quantities from the Jubilee field in 2011.

4. METHODOLOGY AND DATA ANALYSIS

This section of the paper makes reference to the methodology used for forecasting and interpretation of the results.

4.1 RESEARCH METHODOLOGY AND DATA

The approach to the research was adopted from a similar study undertaken in India to forecast the demand for petroleum products and natural gas. [19] The variables used in their study were GDP per capita, price of petroleum products and population. Time series data was used and individual demand models were developed for each petroleum product. The forecasting tool used was based on Log-linear equations.

For the purpose of this study, demand projections for petroleum products by 2015 is centred on demand models developed for each petroleum product. This is to provide an insight into the variables and indicators used. [20] The Time series for the study (2011-2015) was chosen based on the availability of data and the nation’s quest to achieve a middle income status by 2015.

Indicators for the forecast considered population, GDP per capita, and price of petroleum products as independent variables and energy demand taken as the dependent variable.ie. Edd= f (GDP/P, P, POPN)

Where GDP/P represents Gdp per capita, P is the price of petroleum products; POPN represents total population and Edd for energy demand.

An econometric log- linear equation is developed for each petroleum product based on the result from the regression analysis. The selection of the econometric model was considered dependent on R2 values and goodness of fit. The R2 results for each petroleum product showed a high percentage of variation in the dependent variable explained by the independent variable. [21] 

The growth rate based method was used to forecast for all the variables. This method is used for short term forecasting [22] , thus suitable for the forecast period 2011-2015. The annual growth rates for all the variables were calculated and future projections were done based on that. Data for the study was sorted from the Ghana Statistical Service, Ghana Energy Commission, National Petroleum Authority and the World Bank.

4.2 FORECAST FOR INDEPENDENT VARIABLES

This portion of the paper forecasted for the variables used for the projection period.

The growth rate based method is used for short and medium term forecasting. The method was used to forecast for future GDP, price for the various petroleum products and population for the period 2011-2015. This is indicated as follows.

β = ü (1 + Ä¡) Ŧ

Where ü is GDP in the base year

Ä¡ is the growth rate = (c/b)^(1/n)-1 .i.e. where c is the base year, b is the current year and n the number of years.

Ŧ is the future year

4.3 PROJECTED POPULATION FROM 2011-2015

The population of Ghana is growing rapidly and is expected to increase to 27 million by 2020. [23] In 1948, the population growth rate fell from 4.2% to 2.4% in 1960. [24] Since then, the country’s population increased by 2.6% in 1984 and further increased to 2.7% in year 2000. [25] The current population of Ghana stands at 24 million.

TABLE 1: INITIAL POPULATION FROM 2007-2015 (MILLION)

Year

2007

2008

2009

2010

2011

Total Population

22,712430

23,264176

23,824,402

24,391,823

24,965,816

Source: World Bank

TABLE 2: FORECASTED POPULATION: 2011-2015

Year

2012

2013

2014

2015

Total Population

25,440167

25,923,530

26,416,077

26,917,982

Source: Authors Construct, 2013.

From the analyses, the annual growth rate of the population stood at 1.9%. The projected population for the year 2015 stood at about 26 million. There is an anticipation that as population grows the demand for petroleum products is expect to increase “all other things being equal”.

4.4 RATIONAL FOR PRICING PETROLUEM PRODUCTS

In Ghana prices of petroleum products are determined by the National Petroleum Authority (NPA) based on the automatic petroleum product pricing formula (APPPF). [26] It is worthy to note there are four different pricing formulae used in the pricing of petroleum products in Ghana. [27] 

Ex-Refinery Price= CIF + related charges

Related charges= Off – loading Cost + In-transit Losses+ Inspection+ L/C Cost+ Financial Cost + Storage Cost + In-plant Losses + Rack Loading Cost + Operating Margin

Ex-pump Price= Ex- refinery Price + Taxes/ Levies + Margins

CIF = Cost ( FBO ) + Insurance + Freight

TABLE 3: EX- PUMP PRICE OF PETROLUEM PRODUCTS FROM 2007-2011 (GP/Lt)

Petrol

Diesel

Kerosene

LGP

2007

101.99

102.63

93.55

106.14

2008

82.00

88.99

70.00

65.00

2009

116.98

118.05

91.00

83.81

2010

116.98

118.05

91.00

83.81

2011

175.48

177.09

91.00

136.19

Source: NPA, 2013.

TABLE 4: PROJECTED EX-PUMP PRICE FOR PETROLUEM PRODUCTS:

2012-2015 (GP¢/Litre)

Petrol

Diesel

Kerosene

LGP

2012

194.78

196.56

91.00

142.99

2013

216.20

218.19

89.18

150.14

2014

239.99

242.19

88.29

157.65

2015

266.39

268.83

87.41

165.53

Source: Authors Construct, 2013.

From the projected results, the price of petrol continues to rise at an average rate of GH¢2.29 for the period. The price of kerosene continues to drop over the years due to low patronage. This may be as a result of a shift in the use of kerosene to LPG which is considered much cleaner and environmentally friendly to kerosene. This is highly evident in the drastic increase in the price of LPG. Diesel recorded the highest price increase over the period. This reflects the current situation in Ghana.

4.5 GDP FORECAST

According to the Ghana Statistical Service, GDP estimates for 2012 stood at 7.1%. [28] The service sector accounted for the highest growth of 8.8%, industry 7.0% and the Agricultural sector contributing the lowest growth of 2.6%. [29] Forecast for GDP was computed by first calculating the annual growth rate for GDP from 2007-2011 which was later used to project for the subsequent years using the growth rate based method.

TABLE 5: FORECAST FOR GDP 2012-2015 (Billion 2000 US DOLLARS)

YEAR

GDP

2012

10.7

2013

11.4

2014

12.2

2015

13.1

Source: Authors Construct, 2013.

4.6 DEMAND MODEL FOR FORCASTING

The model for forecasting demand was derived from the regression results obtained for each petroleum product. Thus the general model for forecasting is:

β= α + ḁ log (PRICE) + ḅ log (GDP) + ḉ log (POPN)

Where β represents the fuel type

PRICE denotes the retail price for petroleum products

GDP/P establishes the gross domestic product per capita

POPN represents the population

ḁ ḅ ḉ are the coefficients and α is the intercept

4.7 INDIVIDUAL DEMAND MODELS

Econometric models were developed for each fuel type dependent on the regression results.

4.7.1 MODEL FOR LPG

Demand for LPG in Ghana has been projected to stand at 250,000-300,000 tonnes yearly. [30] This figure is not surprising due to its current benefit it offers to the nation for transportation and domestic use. The demand is expected to increase by 2015 per the projections of the study. The reason accounting for its high demand is the conversion of some public transports into using LPG as discussed earlier. It is worth mentioning that the introduction of the LPG promotional programme has also projected the demand for LPG as an alternative fuel to charcoal and firewood. [31] 

LPGDD = -175.529 + 0.086 (PRICE) -5.035(GDP/P) +25.104 (POPN)

R2 = 0.841

Results from the analysis indicates that demand for LPG will continue to be inelastic signifying an increase in price will not necessary have effect on the quantity demanded. This is evident in the high demand for LPG in Ghana due to its importance to the economy.

4.7.2 MODEL FOR PETROL

Petrol is a major source of fuel for transportation purposes in Ghana. In 2011, it accounted for 871.6 (ktoe) of final energy consumption. [32] 

PETDD = -58.653 + 0.312 (PRICE) -1.877 (GDP/P) + 8.886 (POPN)

R2 = 0.999

From indications, the price of petrol is less than 1. This implies price of petrol is inelastic. This implies price increases will affect demand .The case in Ghana is no different from this result since commercial taxi drivers are shifting away from the use of petrol owing to price increases.

4.7.3 MODEL FOR KEROSENE

Kerosene in Ghana is used for cooking and a source of lighting. The demand for kerosene is declining especially in the urban areas due to its health and environmental concerns. The government’s effort at reducing the use of kerosene in the rural areas is backed by its “Energy for all Policy”. [33] In the interim, the government is providing solar lighting systems and plans to connect most rural communities to the national electricity grid.

KERODD = -27.055 + 2.269 (PRICE) -1.364 (GDP/P) +3.886 (POPN)

R2 = 0.637

The coefficient of price is greater than 1, meaning the price for kerosene is elastic. This implies changes in price, will have an adverse effect on the demand. In other words, increase in kerosene prices will result in a decrease in demand for it “all other things being equal”.

4.7.4 MODEL FOR DIESEL

Diesel is very important to the Ghanaian economy. Diesel is used to power most heavy duty machines in the industrial sectors. It is also a source of fuel for transportation and generation of power during power outages. Its share of contribution to final energy consumption in 2011 stood at 1,545.7 (Mtoe). [34] 

DSLDD = 24.918 + 0.176 (PRICE) +1.292 (GDP/P) -2.764 (POPN)

R2 = 0.835

The price of diesel in this case is inelastic. Any change increase in price does not really affect demand. Consumers will continue to bear the cost unless there is any other alternative.

4.8 DISCUSSION OF RESULTS FOR PROJECTED DEMAND

Total demand for petroleum products from 2012 to 2015 is represented below.

TABLE 6: F0RECASTED DEMAND FOR PETROLUEM PRODUCTS BY 2015

 PRODUCTS/ YEAR

2012

2013

2014

2015

LPG

472,282.506

485,348.9364

498,440.1

511,557.6

Petrol

227,030.211

238,120.54

249,9441

264,406.7

kerosene

27,755.20

27,535.85

27,524.87

27,515.78

Diesel

1,302,657.11

1,354,792.28

1,411,127.0

1,472,126.0

Total

2,029,725.02

2,105,797.60

4,436,532.97

2,275,606.08

Source: Authors Construct, 2013

From the table above, it is evident the demand for petroleum products increases annually as population grows. Results from the analysis shows that the demand for diesel has been increasing over the years at an average growth rate of 3% from 2012 – 2015.In Ghana, diesel is by far the most extensively used fuel in the transportation, industrial and agricultural sectors of the economy. In 2011, diesel recorded the highest import of 1,296.6 (ktoe) of the country’s energy balance. [35] The demand for petrol continues to grow in the subsequent years but the growth has been quite slow due to the competition LPG poses to it in terms of transportation.

LPG recorded the second highest demand with annual growth rate of 2%. Rapid increase in demand for LPG is not surprising due to its current demand in the transportation and domestic sectors of the economy. As stated earlier, most commercial vehicles in Ghana have converted their engines into using LPG which is comparatively cheaper to diesel and petrol. This has resulted in frequent shortages in recent years. The demand for kerosene has been decreasing over the years. In 2011, kerosene recorded the lowest petroleum product consumed at 62.4 kilo-tonnes. In Ghana, kerosene is normally used for cooking and lighting in the rural areas. Reduction in its patronage over the years may be attributed to the government “Energy for all policy” and the national electrification scheme to connect all rural areas to the national grid by 2020. The projected total demand for petroleum products by 2015 stood at approximately 2.3 million metric tonnes as compared to 2.49 million metric tonnes projected by the Energy Commission by 2015.

5. CONCLUSION

Energy is vital to a nation’s socio-economic development. The struggle for energy by countries in the past has reflected in their current stage of development. The United States, China, Germany, and Russia among others have demonstrated how important energy is to their economies. Ghana as a developing nation is coupled with some challenges in its energy sector and for that matter the gap between demand and supply of petroleum products over the years. The shortage of these products has been attributed to several factors both locally and internationally. The major issue to be addressed from my point of view is to answer the question “how much energy do we need in the future”? This question calls for adequate planning and implementation. An analysis into the subject matter thus “Demand forecasting for petroleum products in Ghana by 2015” has provided an insight for decision makers in the petroleum sub-sector to put the necessary logistics in place in meeting the demand.

5.1 RECOMMENDATIONS

There is the need for government to expand the existing 45000bb/d capacity of the Tema oil refinery to make room for future demand

The need to upgrade the existing or build a new refinery, to be able to refine crude from the jubilee field which is considered to be ‘sweet light oil” and not compatible with the existing infrastructure at TOR.

Promotion of private sector involvement or participation in the downstream value chain.

The government must put in place the necessary legal structures to punish retailers who hoard petroleum products in anticipation of future price increase thereby creating artificial shortage.