EXPLAINER: Why gold-for-oil policy cannot be the reason for recent fuel price reductions

The Vice President, Dr. Mahamudu Bawumia, and other proponents of the Nana Addo Dankwa Akufo-Addo government have been touting the government’s Gold-for-Oil policy as the reason for the reduction in the prices of fuel products seen over the past few weeks.

Petroleum products which were selling averagely around GH¢15 in January 2023 are now selling around GH¢13 on average.

The claim by the vice president that the Gold-for-Oil policy, which is reported to be his brainchild is working, has become a matter of public discourse with some experts and members of the opposition National Democratic Congress (NDC) accusing Dr. Bawumia of deceiving Ghanaians.

But what exactly is the cause of the recent reduction in the prices of fuel products seen in Ghana? This article seeks to throw more light on why the prices of diesel and petrol have been coming down in Ghana over the past few weeks.

How oil prices are determined in Ghana:

Fuel prices in Ghana are basically determined by two key variables, namely: the exchange rate and international prices of crude oil prices. Other important variables in the determination of fuel products are the taxes and levies the government places on these products and the profit margins of Oil Marketing Companies (OMCs).

The records show that crude oil prices on the international market have been dropping over the past few months. In January world oil price was around $87 per barrel, in February it reduced to $86, and as at now, it is being sold averagely around $74.47 per barrel. In fact, international intermediaries like West Texas Immediate (WTI) are selling their products at $63 per barrel and the prices of these products are even expected to reduce further due to the increase in supply by major oil-producing countries.

Also, the Ghana Cedi, even though it is relatively stable compared to previous months, is not appreciating (gaining value) against Ghana’s major trading currencies including the dollar for it to be the cause of the reduction in the prices of oil products.

The government has also not announced reductions in taxes and levies on oil products.

In other words, OMCs announce the prices of oil products during their pricing windows depending on the factors stated above. The determining factor that is drastically reducing and can be the reason for the reduction in fuel prices in Ghana is the price of these products on the international market which has reduced by more than 12 percent between January and now.

The Gold-for-Oil policy

Vice President Mahamudu Bawumia in November 2022 first announced the government’s plan to undertake the Gold-for-Oil initiative. The deal hinged on buying oil products with Ghana’s gold instead of the US dollar.

Dr. Bawumia explained on Facebook that using gold to buy oil would help Ghana's dwindling foreign reserves while also reducing demand for US dollars from oil importers.

“It will fundamentally change our balance of payments and significantly reduce the persistent depreciation of our currency,” the vice president wrote.

Under the policy, the government believes that using gold to purchase oil products would also bring stability to the exchange rate market and ensure domestic oil operators do not solely depend on foreign exchange to import products.

The government, through the Bank of Ghana (BoG), is expected to purchase gold from mining firms in Ghana. The BoG will then use the gold through 3rd parties to purchase the oil on behalf of bulk oil distributors in the country and thus eliminating the use of foreign currencies by these oil distributors to import their products.

So, basically, the policy aims to reduce the depreciation of the Ghana cedi and to some extent reduce the prices of fuel products since the exchange rate is also an important factor in the determination of the prices of these products.

What Gold-for-Oil policy has brought in so far

The operationalisation of the Gold-for-Oil policy started in January and so far two consignments for 40,000 metric tons of oil have been brought into the country through the policy.

Price argument:

For the policy to be effective, its products must be sold at prices lower than that of the international market and the quantity of oil it supplies must cover a substantial amount of the oil demands of the country.

The government has not been transparent on the cost it incurred in bringing in the oil products under the policy. It is, therefore, logical for people to doubt the efficacy of the policy, the government is touting.

In fact, some analysts including Dr. Theo Acheampong, an economist and a political risk analyst, have stated that the cost of fuel products from the policy is relatively higher than fuel from other sources.

Quantity argument:

Also, even if the products of the Gold-for-Oil policy are cheaper, the quantity of oil supplied under the policy must be significant for it to have any impact.

So far, about 80, 000 metric tons of oil have been brought into the country under the policy and this will not meet the demand for oil products in Ghana for even two weeks.

According to the Head of Research and Training at the Chamber of Petroleum Consumers (COPEC), Mr Paul Ofori, Ghana’s demand for oil is approximately 11,500 metric tons per day and the 80,000 metric tons is insignificant to affect prices.

Fuel type argument:

Currently, the prices of both diesel and petrol products are dropping. The Gold-for-Oil policy has only brought in diesel, according to the Chamber of Petroleum Consumers (COPEC), so how can it lead to a reduction in the price of petrol?

In a nutshell, the facts available show that the Gold-for-Oil policy cannot be the reason for the reduction in the prices of oil products. If the government really wants to prove to Ghanaians that the policy is working, it should go beyond its rhetoric and provide figures that show that the policy is working.

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