The global oil price was hovering near 100pbl last week, with little sign that it was retreating to even 95 dollars. This is due to several shock factors, but more importantly as a result of surge in demand, China and India being the major culprits.
 

Pretty much elsewhere in the world, consumers absorb the addition because open markets have systems that pass on the increase to them. The soaring price of oil has sent shivers through international financial markets and governments of non-oil producing countries, although it is a bonanza to those which produce fossil oil. Recently hitting triple figures for the second time in history [the first was a brief supply shock in April 1980], and up 60pc this year from the 60-dollar figure that troubled industry analysts, the oil price is indeed a formidable challenge for Ethiopia.
 

This is especially so in the local market, where all fuel products are imported by the state petroleum enterprise, Ethiopian Petroleum Enterprise (EPE). The heavily regulated sector is immune from these international price shocks only due to the massive subsidies provided by the federal government, estimated to cost over 100 million dollars a year. Fuel prices in Ethiopia have not been adjusted according to the global market for a little over a year now.
 

Unlike the situation in the majority of fuel importing countries, consumers at pumps in Ethiopia have not felt the crunch as fuel prices have not increased since August 2006 when oil was at 65 dollars a barrel. Still, a litre of benzene is available at gas stations in Addis Abeba for 7.77 Br, diesel for 5.44Br and kerosene 4.12 Br.

The government of the Revolutionary Democrats has a reputation of being hesitant to alter these prices for a variety of reasons. Keeping macro economic stability and fear that passing prices on to the market may send consumer prices to the roof are the main reasons.
 

True, the energy sector is unique in many ways as it is an input to just about every production process in the economy. Fuel costs affect just about every market as goods need transporting, and services also usually involve energy inputs. The current regime is very sensitive to the reverberations felt when oil prices are adjusted. Judging from history, they should be.

Increases in fuel prices are often cited as one of the initial contributing factors to prompt people in Addis Abeba to revolt against Emperor Haile Selassie. Causing the end of a centuries-old monarchy is quite a feat, and to be feared from a regime that has enjoyed power for 17 years.

Moreover, the ruling party says it wants to avoid the shocks involved in fuel price increments in favour of macroeconomic stability.
 

But at what cost? The government may soon discover that it has bitten off more than it can chew if it does not act boldly.
 

Budget deficits have become the norm in Ethiopia, accepted even with the massive aid packages trickling in from donor countries. The World Bank claims the budget deficit excluding grants reaches close to 10pc of GDP in 2006, although significantly dropped from 14pc the previous three years.
 

One of the contributing factors for the budget deficit and negative balance of trade is both an increase in the volume and value of imported oil. The volume has increased to a record high 720,000tns last fiscal year, while the national oil expenditure that was 300 million dollars in 2003/04 shut up to 700 million dollars in 2005/06. Importing one billion dollars in petroleum products last Ethiopian fiscal year ate up about 87pc of the foreign exchange reserves. This also has its effects on the economy at large.
 

In many of oil exporting countries, inflation is on the downward spiral, judging from surveys conducted by the International Monetary Fund (IMF). Even Sub-Saharan Africa shows a modest decline in an average inflation between 2000 and 2006, disclosed the IMF. It is those non-oil exporting countries in Africa that toil due to inflation beginning 2004, the year when the international oil price started its upward journey.
 

Fiscal deficits contribute to the inflation that is hitting urbanites hard as the consumer price index (CPI) rose to 16.7pc in July, although the World Bank puts average annual rate at 12.3pc. Though the local troubles are probably more of a monetary phenomenon, delving further into the red will not help the situation. 
 

The present international price hikes call for an immediate short-run measure. Fuel costs will inevitably have to be passed on to the consumer to some extent. This will serve to alleviate a fraction of the pressure on the public budget.
 

While it may be argued that this will hurt already cash-strapped households, if the government foots the cost, the strain on the public coffers will eventually translate into higher consumer prices. Moreover, the government will be forced to divert funds from the pro-poor spending it has had moderate success with in the past few years.
 

It is clear that the national fuel fund, the stockpile of unutilised cash not spent on fuel earlier, will run out soon under the current conditions. Though analysts expect oil prices to moderately level off, the 88 dollars a barrel predicted to prevail next year are no respite for a non-oil producing country such as Ethiopia.
 

The thirst for energy is not going away, in Ethiopia and the rest of the world. With the second largest population in Africa topping 81 million and showing no signs of cooling-off, Ethiopia's fuel needs are rising, not falling. Although there are explorations conducted by the Malaysian Petronas, in Gambella Regional State, as well as Chinese ventures into the Ogaden, Somali Regional State, volatile as the latter is, these are no assurance in the near future that the country may not look in to the international market for unforeseeable future. A short-run solution to a problem that will not go away is not a wise move.
 

Moreover, one of the offspring of the gross domestic product (GDP) growth hovering in double digits for three years is pleasantly higher disposable incomes for many citizens. Though this is good news for many, notwithstanding inflationary woes, it means more demand for fossil fuels and products (almost all) that require oil in their production.
 

Even the most basic commodity like food is not immune to shocks as a result of oil prices as agriculture requires imported fertiliser, and demand elasticity is sensitive to increments due to increased transport costs. The government can continue attempting to foot the bill and control the supply of this crucial input; it is not sustainable.
 

A better option is to allow private businesses into the sector, regulated as they can be. Private companies have the flexibility to quickly react to market signals and capture demand to make profits. And they should do that.
 

This is in direct contrast to the sluggish reaction that characterises government actions. Considerations of political balance sheet and bureaucracy impede decision-making and often require numerous jumps to be made before results are achieved.
 

The budget of the federal government (43.9 billion Br) is dwarfed by the big names in the international fuel sector. The largest company in the world in terms of revenue (376 billion dollars in the year leading up to April 2007), Texas headquartered-Exxon Mobil Corporation, has resources far beyond Ethiopia to reach consumers. These big players, together with their local partners, can navigate rough times and continue to supply the market.
 

Liberalization is not the only answer, though.
 

Energy saving is also important for poor countries that are shown to expend twice as much oil to produce the same unit of economic output as developed nations. There is also international funding support for schemes that aim for higher energy efficiency.

Many programmes originating from the United Nations (UN) and World Bank have sustainability aims more easily inserted into development with their massive budgets. Moreover, the buzzwords associated with cutting fossil fuel consumption in this environmentally sensitive age attract the ears of donor countries.
 

Alternative energy sources also must be exploited. Granting land for bio-fuel production is a step in the right direction but will take years to reach fruition like similar projects have in Brazil. Exploiting the vast hydroelectric power is also helpful.
 

But all these efforts will pale in comparison in the next few years to energy consumption increases. As roads are paved across the country and the investment that is hoped to continue flowing, demand will only continue to soar, with a 20pc annual growth, according to studies. It is important that the government recognise the limitations it has in continuing to directly subsidies oil pumped into gas stations. Neither does it have to loose the benefits of subsidised fuel accruing to this poor nation.
 

Liberalization of markets does not necessarily mean leaving behind the low-income groups that benefit from cheap fuel. Targeted subsidy programmes that benefit the poor through coupon offerings or specifically granting cheaper fuel to carriers of foodstuffs can replace the current all-encompassing generosity. Moreover, the tax earned from those paying for private gasoline consumption could aid in building the very roads that those able to afford a car drive on.
 

Not all oil is destined for the same end use either. The gas used for household cooking needs can continue to be made cheap at the cost of the state, but continuing to subsidise private vehicles is not effective. These programmes may be a little revolutionary for a regime that has been hesitant to let the free market play a larger role in the economy. Reforms in Ethiopia have not proceeded at the speed they should.
 

For now, the government cannot pretend like it can continue to foot the bill; it must adjust fuel prices to a reasonable degree and in a manner that can reflect the international market. This is only until it finds the stomach to consider long-term solutions.