Determinants of petroleum prices in Ghana, 1985-2005

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ABSTRACT Governments over the years have been spending huge sums of money to import crude oil to meet the increasing demand for petroleum products due to high demand for it and economic growth, population growth, urbanization and industrialization. However, the pricing of the products remains controversial in many developing countries including Ghana. Whereas some argued that regulatory petroleum pricing protects the interest, of the poor against excessive price hikes, others are of the view that this type of pricing deprives the government of getting enough revenue to increase investor confidence in the oil industry. The tenet of the argument is to allow retail petroleum prices respond to its key determinants. One major controversy surrounding retail petroleum pricing in Ghana is the consensus on the key price determinants. It is against this background that the objectives of the study were formulated to: establish the extent of relationship between retail petroleum pricing and its key determinants and analyze the socio-economic effects of petroleum deregulation in Ghana. Available literature has shown that there is a strong relationship between retail petroleum prices on one hand and its key determinants, thus crude oil price and exchange rate on the other hand. The petroleum Price Asymmetry Model by Borestain, Cameron and Gilbert (BCG), 1997 cointegration and error correction model have been adopted. The results indicated that retail petroleum prices in Ghana adjust prices slower. The deregulation according to most of the respondents is associated with the increase in petroleum prices and reduction in consumer welfare. The respondents rather preferred regulation of petroleum prices whiles the industry experts, mostly from the National Petroleum Authority (NPA), Tema Oil Refinery (TOR), Oil Marketing Companies (OMCs), Ministries, Departments and Agencies preferred deregulation. The study therefore, recommends that government should continue the policy of deregulation but rather make the system more transparent to enable the public understand the price adjustment process. This will avoid the frequent demonstrations against the petroleum price changes especially upward changes.
A Dissertation submitted to the Department of Economics, Faculty of Social Sciences, in partial fulfilment of the requirements for the award of the Degree of Master of Arts in Economics (MA. Economics), 2008