The price of oil in Ethiopia is totally blind to the signals from the international market. While a price of a barrel of oil doubled from 40 dollars in two years since 2004, Ethiopia’s gas stations are collecting the same fee per litre today as they did then.
 

And if the government finds itself in a very awkward situation in its management of the fuel business, it has only itself to blame. Worried not to exacerbate the burden of inflation on household levels, it chose to spend huge amounts on subsidizing, which could equate it with a drunken husband who spends his salary enjoying the night.
 

The result is indeed alarming. Oil bills have increased from 3.3 billion Br in 2003 - 04 to a staggering 5.3 billion Br the following year, representing 10.5pc of the GDP, up from seven per cent the previous year. This huge appetite in oil subsidy put pressure on the larger macro-economic stability, already eating up the budget.
 

Yes, the economy has grown fast for  consecutive years, as exports have shown a positive surge. Nonetheless, the nation’s import bills have escalated by 40pc (or about a billion dollars), with significant portion being spent on oil. According to latest IMF reports, this has led to a widened external current account deficit representing 9.1pc of GDP in 2004 - 05, in spite of export growth of 36pc.
 

Ethiopia is not an exception to an adverse impact of rising oil prices in the international market. In fact, the world was little prepared for what was coming since 2002. Prior to that, it has been enjoying cheap oil, whose price was limited to the 20 dollars per barrel pretty much of the 1980s and 1990s. Nor is global price of oil hitting the roof due to temporary political tensions in the Middle East such as the one in early 1990s after the invasion of Kuwait. Governments could think of warding off short-lived oil hikes with subsidies, as this administration had thought would be the case.
 

Unfortunately, this time around, the increased oil price is because of growing thurst of the major economies and the new entrants such as China and India, rather than a reduction in supply or hiccups of political turmoil, although the latter plays a part. Despite a projection of an added 15 million barrels a day in new production by 2010, the increase in oil price is here to stay, according to future markets. Some even forecast it to jump over the 100 dollars per barrel threshold, for the first time in world history.
 

Either concerned with hyperinflation or convinced that prices would fall, Ethiopian policy makers have lost the opportunity to adjust the domestic oil price – and less painfully and gradually – since December 2004. Thus, Ethiopia became the most attractive destination for international airlines that fill their bellies for 1.63 dollars per gallon. Cheap oil, indeed!
 

During his press conference last week, where members of the private press were invited for the second time, Prime Minister Meles Zenawi has made obvious his government’s intention to stop this practice, although he was not clear how. Introducing an adjusted but uniform price to all airlines and refund the differences to the national carrier later in the year is a plausible idea his government could be interested to consider.
 

The less likely options left to the government are to increase the amount and value of exports of the country so that it can pay off its oil bills. With the current huge trade deficit, this is very unlikely to happen any time soon. Although less attractive for political reasons, fulfilling donors’ wishes to introduce several governance reforms and providing a political solution to those opposition leaders and journalists behind bar could improve their relations enough to resume the direct budget support. Obviously, the ruling party has been proven unflinching on this issue, and preferred to withstand such demands at any cost.
 

Energy saving is an area the government can put its efforts into. According to studies, Ethiopia finds itself among a list of countries that use energy less efficiently than developed economies. Such poor countries use twice as much oil to produce a unit of economic output as developed nations do.
 

Expanding the alternative energy sources available, for example ethanol, is another front the government could focus on; because experts advise with the proper management it is certainly feasible. Ethiopia is believed to produces about 12 million litres of ethanol annually. Blending it with gasoline with the recommended amount of 10pc only takes 1.2 million litres. It can also be used for household energy consumption, replacing kerosene, but with the safety-guaranteed stoves. What remains could be exported, as has been the practice for the past couple of years, serving as a source of foreign exchange.
 

Anything less than absorbing the increase in international prices; exploring an alternative source of energy or working on the saving front require this government to strike a balance between transferring the burden to the consumers, while maintaining macroeconomic stability. But how to deal with the general public after lifting oil subsidies is a thorny issue.
 

There are those who recommend a discriminatory approach where different types of coupons would be introduced to be used by different groups of the public, depending on their income bracket. The idea is to keep oil price lower for low-income groups, while letting those who are employed by international organizations - according to international scale, the organizations themselves, companies and others who are deemed to afford to sustain the burden. The time and cost of managing this complex operation sounds like it will outweigh the solution it is meant to offer.
 

It is understandable that the government is worried about inflationary factors on households when the price of fuel gets adjusted. The trickle down effect on the supply chain and the possibility that it does negatively affect the consumer price index (which is 13pc according to the IMF) is real. Double-digit inflation in Ethiopia has lately emerged as the single most formidable threat to the welfare of underprivileged households. It will continue to worry a lot of people in all income brackets.
 

This process also has a domino effect on the domestic economy in general and on consumer prices in particular as higher fuel prices are certainly going to exacerbate inflation by leading to parallel increases in the prices of basic consumer goods such as grain and sugar to name but two of the most critical items, thereby pushing the inflationary spiral upwards. The inevitable fuel price increases are certainly going to make life even more unbearable for millions of people across the social spectrum.
 

The impact will be felt in two ways: in transport and energy use, as well as through the rise of the consumer price index.

The hardest job on the government’s hands would be to persuade a sceptical public how long economic growth at the national level might coexist with worsening standards of living at the household levels. Things might get worse before they get better as they say. For now, the public has no choice other than bracing to absorb the fuel price shocks that will certainly exacerbate the threat of higher inflation.