In January 2025, the Public Finance Fuel Price Tracker updated its methodology for calculating the formula price of 92 Octane petrol and Auto Diesel. Below are some common questions regarding the fuel price formula, the reasons behind the change in methodology, and the key aspects and rationale for the adjustments made.

1. What is the Fuel Price Formula?

The purpose of the Fuel Price Formula is to:

1. Convert Global Prices per barrel to Local: It translates the price from USD per barrel to Sri Lankan Rupees (LKR) per litre.
2. Add Additional Costs: It adds reasonable expenses such as transportation, processing, administrative fees, and taxes.

The aim is to find the cost-reflective price, which is a fair accounting of the full cost of delivering fuel at the pump.

The cost-reflective price for the government owned entity should aim to cover all relevant costs of every aspect of operating the entity and would not add any extra profit margin, which would be relevant only if there was an investor who required a return on investment.

2. Why Implement a Fuel Price Formula?

In the past, local fuel prices often remained unchanged for several months. This practice led to two main issues:

1. Welfare Loss on Society: When global fuel prices dropped below local prices, consumers didn't benefit because the lower costs weren't passed on to them.
2. Financial Strain on CPC and the Government: When global prices rose above local prices, the suppliers, including the Ceylon Petroleum Corporation (CPC) and the government, had to cover the extra costs, leading to financial burdens.

To address these problems, it's important to align local fuel prices with world market prices. However, global prices are quoted in U.S. dollars per barrel and don't include additional costs like, processing, administration, and taxes.

3. What is the Fuel Price Formula based on?

The Fuel Price formula mentioned in the Publicfinance.lk is based on the fuel formula developed by the Ministry of Finance together with IMF’s assistance in 2018 (see link).

The formula is as follows;

Fuel Formula Price=V1+V2+V3+V4

Where:

V₁ = Landed Cost (Rs./Litre)
Which includes Singapore Platts Price per Barrel, Weighted Average Premium per Barrel, Loss due to the Evaporation and Exchange Rate (US$/LKR).

V₂ = Processing Cost (Rs./Litre)
Which includes Local Port Charges, Transport Cost, Dealer’s Margin including losses due to Evaporation to Dealers and Stockholding Cost.

V₃ = Administrative Cost (Rs./Litre)
Which includes Administrative Expenses including Personnel Cost, Depreciation, and other cost elements, if any.

V₄ = Taxation (Rs./Litre)
Which includes Customs Import Duty, Excise Duty, Ports and Airports Development Levy and any other taxes applied to fuel
 

4. How is the Fuel Price Formula calculated?

Based on the Ministry of Finance’s figures provided under each category (V1, V2, V3, and V4), the figures were reverse-engineered to  be used in the formula. See below table on how each variable is obtained to be added to the table.
 

Exhibit 1: Key Variables and Assumptions for Fuel Price Calculations

5. Why is the formula price of Public Finance.lk different from the formula price released by the Ministry of Energy?

The Ministry of Energy publishes a formula price through their “Pricing of Imported Refined Petroleum Products As Per The Pricing Formula.” However, the prices they report are slightly different from those on PublicFinance.lk. For instance, in November 2024, the Ministry of Energy listed the formula price of petrol at LKR 310.2 per litre, while PublicFinance.lk reported it as LKR 298.5 per litre. This results in a difference of LKR 11.7. (See table below for details)

Exhibit 2: Illustrative Example of the discrepancy (November 2024 Petrol 92 Price)

The discrepancy between the Fuel Formula Price on PublicFinance.lk and that released by the Ministry of Energy arises mainly due to two reasons:

1. Additional Variables in the Ministry's Formula:

The Ministry of Energy includes extra components in its fuel price formula that are not present in the original formula developed by the Ministry of Finance. These additional variables are:

• • V3: Stockholding Cost
  • V6: Profit Margin (up to 4% of the total cost per litre)
  • V7: Cost Savings from Refinery Production

Note: The Stockholding Cost and Cost Savings from Refinery Production are not consistently applied every month.

2. Different Calculation Methods for the Same Variables:

The Ministry of Energy and PublicFinance.lk calculates certain cost components differently. Below is a comparison highlighting these discrepancies.

Exhibit 3: Discrepancy between the Ministry of Energy Formula and Publicfinance.lk formula

The main reason for the discrepancy in the same variables is that the Ministry of Energy adjusts its formula components monthly to reflect actual costs, including variables that may not be consistent with the original formula and is not publicly available (cost components only known by the CPC) . Therefore, this can introduce additional costs that are not accounted for in the original formula developed by the Ministry of Finance.

However, the ministry of finance press release clearly states

“According to the above pricing formula, Singapore Platts per Barrel and Exchange Rate are two uncontrollable variables. Other components are either controllable variables or fixed components”

This ensures that the formula remains reasonably cost-reflective without incorporating inefficiencies or ad-hoc cost changes. This methodology prevents additional costs arising from inefficiencies from being passed on to consumers.

6. What is the Revision in the Formula Price for Publicfinance.lk ?

Based on the reconciliation of the formula price of the Ministry of Energy, Publicfinance.lk has identified certain changes that may better reflect the current circumstances. And accordingly has incorporated the following changes to its fuel price mechanism.

1. 1. Landed Cost: Exchange Rate Adjustment and Evaporation Loss Separation Publicfinance.lk has introduced two revisions to the landed cost calculation for fuel pricing: first, the per-barrel USD price is now converted to LKR using the Telegraphic Transfer (TT) selling rate for USD/LKR instead of the indicative USD spot rate, reflecting the actual costs faced by fuel importers. Second, evaporation loss, which was previously included in the premium, is now calculated separately as 0.3% of the cost per barrel, while the premium remains at USD 3 for petrol and USD 2.3 for diesel but no longer covers evaporation loss.
2. 2. Processing Cost Adjustment: Due to increased processing costs incurred by the Ceylon Petroleum Corporation (CPC) and the suitability of a volume-based cost indicator, the processing cost has been revised. It will now align with the CPC’s costs, set at USD 0.06 per litre for petrol and USD 0.05 per litre for diesel.
3. 3. Administrative Cost Reduction: The Ministry of Energy now utilizes a lower administrative cost of 2%, compared to the previous 4%. The formula will be updated to reflect this reduced administrative cost of 2%.
4. 4. Inclusion of Social Security Contribution Levy (SSCL): A Social Security Contribution Levy (SSCL) of 1.25% has been added to the tax component. This inclusion aligns with the Ministry of Energy’s practices and accurately represents the taxes paid by the CPC.
   5. Revision of Customs Import Duty (CID) Waiver: The CID waiver has been increased to LKR 50 per litre to match the figure used by the Ministry of Energy, assuming their tax calculations are accurate. However, it should be noted that there is currently no publicly available documentation to confirm this tax waiver.
   6. Revised VAT Calculation: The VAT calculation has been adjusted to incorporate the duty waiver, ensuring that it is computed accurately in accordance with the Ministry of Energy’s methodology.

Exhibit 4: Comparative Analysis of 92 Petrol Pricing: Original vs. Revised Formula (November 2024)

Exhibit 5: Comparative Analysis of Auto Diesel Pricing: Original vs. Revised Formula (November 2024)

7. Why are the other discrepancies not included in the Revised Formula Price for Publicfinance.lk ?

Publicfinance.lk has reviewed various discrepancies in the existing fuel pricing formula but has chosen not to include some of them in the revised formula. These excluded components are primarily additional elements that do not consistently reflect actual costs. The reasons for their exclusion are as follows:

1. Profit Margins to CPC: Profit margins provided to the Ceylon Petroleum Corporation (CPC) are not directly linked to actual costs, making them unreliable for inclusion in the formula.
2. Refinery Cost Savings: Savings from refinery operations are specific to CPC and apply only to a portion of the amount sold. Additionally, these savings are applied inconsistently across different months, which undermines their reliability for the formula.
3. Stockholding Costs: Stockholding costs are currently included under processing costs and are sporadically factored into monthly calculations. This inconsistency makes them unsuitable for inclusion as a separate component in the revised formula.