One fuel price formula, many factions, no consensus?

By Madhusha Thavapalakumar

The government, the state energy corporation, independent researchers, and opposition politicians are all at odds over how Sri Lanka prices its fuel and what, if anything, should be done about it.

Middle East tensions have driven Singapore‑linked refined‑product benchmarks sharply higher, and Sri Lanka, a country that imports every drop of the fuel that runs its economy, is now inside a pricing storm whose severity is matched only by the incoherence of its public response.

What does the Cabinet say?

On 24 March, Cabinet spokesperson Dr. Nalinda Jayatissa stood before the weekly Cabinet media briefing and told journalists that the recent fuel price revision was not produced by the pricing formula. The formula, he argued, was built for normal volatility, not for shocks of this magnitude. 

He said that a surge in crude oil prices from around $ 70-78 to $ 130 cannot be accommodated within the pricing formula. He explained that minor fluctuations of about $ 4 or $ 5 can be absorbed, but a sharp increase of this scale is beyond what the formula can manage.

What does the CPC say?

Hours later, Ceylon Petroleum Corporation (CPC) Managing Director Mayura Neththikumarage sat before the cameras and said the opposite. 

“The fuel prices were revised in line with the pricing formula,” he said. “There is nothing out of the ordinary in that.” He explained that the perceived contradiction arose because the government absorbed a portion of the cost through a subsidy, creating the impression that the formula had not been followed, even though it had. 

“What the Minister may have been referring to is that when the Government covers part of the cost, the final price may not seem to align with the formula,” he added. “But the pricing is still calculated based on it.”

One crude oil shipment had already been missed in the current month, as he said, though the CPC Managing Director insisted that tenders had been reopened across diesel, petrol, furnace oil, and aviation fuel, and that stocks were secured through mid-May.

Two officials, one government, one pricing formula, and two irreconcilable accounts of what happened on the same day.

A second remark from the CPC

CPC Chairman D.A. Rajakaruna has placed specific figures into the public domain that give the dispute its full weight. A litre of diesel, calculated on cost-recovery principles, should be priced at Rs. 586.56. 

The pump price is Rs. 382, which means the government is absorbing Rs. 204.56 on every litre of diesel sold nationwide. For petrol, the cost-reflective price would be Rs. 430 per litre; the current price of Rs. 398 produces a loss of Rs. 32.72 per litre. 

Across national volumes, the subsidy bill runs to approximately Rs. 20 billion per month.

What does the President say?

President Dissanayake addressed the Parliament on 20 March and laid out the arithmetic behind the price revision. “If the global oil price increases by $ 1, our domestic fuel price increases by Rs. 2,” he said, describing the formula’s basic price transmission logic.

Procurement costs had worsened independently: long-term tender premiums had risen from $ 2.50 to $ 40 per barrel because suppliers began demanding security guarantees before committing to shipments with Sri Lanka, the President claimed.  

The private sector complication

Sri Lanka’s fuel pricing debate cannot be treated as a matter between the government and the CPC alone. Private operators control 43% of the domestic fuel market, according to the President, and they are not subject to the government’s instructions on pricing. When state-administered pump prices fall below cost-recovery levels, private companies face arithmetic that the state can defer, but they cannot.

The President addressed this facet of the pricing conflict directly in Parliament, speaking to the private sector’s calculation of its own losses. “If the fuel they import is not sold at prevailing market prices, they will not proceed with imports,” he said. “Based on their calculations, each shipment would result in a loss of about $ 55 million.”

A price gap of Rs. 100-150 per litre between state and private stations, he warned, would cause private operators to pull out of the market altogether, leaving the public queuing for hours at CPC stations. Sri Lankans who lived through 2022 do not need to be told what that looks like.

The QR-code fuel quota scheme now in operation is the government’s current instrument for managing demand within this constraint, with officials arguing it will regulate consumption and prevent queues from forming. 

An economist’s diagnosis

Verité Research Lead Economist Raj Prabu Rajakulendran identifies the root of the public confusion in the absence of a single disclosed fact. “The fundamental problem is that we don’t know for how much we are importing fuel, and that’s why you see multiple statements being put in,” he said. 

“What truly matters in the formula price is the import price per barrel.” Without that figure in the public domain, every announced subsidy and every formula-compliance claim rests on inputs that cannot be independently verified.

According to Verite Research and Rajakulendran, the IMF programme does not prohibit subsidies; it requires that the CPC not accumulate losses. A centrally financed government subsidy that keeps the CPC cost-reflective while holding pump prices below formula levels is not a violation. 

“The government can give the CPC as an entity a cost-reflective subsidy so the entity is not loss-making, which is completely in compliance with the IMF programme,” Rajakulendran explained. “There is no concern.” The concern Verité raises is in what the current policy stores up for future price movements, and whether the absence of disclosed landed costs allows the government to claim subsidies that are theoretical rather than real. 

A third way that has gone unexamined

Verité Research challenges the view that cost-recovery pricing and consumer protection must move in opposite directions, arguing that distortions within the pricing structure itself can be addressed without breaching fiscal commitments. Its analysis outlines a set of adjustments to how the formula is applied during periods of sharp price increases.

The first relates to administrative costs. Under the current formula, these are treated as a percentage of the landed cost of fuel, causing them to rise automatically when global oil prices increase. In practice, most of these costs are fixed and do not vary with import prices. Applying them as a constant rather than a percentage would remove an embedded amplification effect that inflates prices without reflecting any real increase in cost.

The second concerns fuel taxation. VAT and the social security contribution levy are both calculated as a percentage of the landed cost, which means that tax collection rises in line with global prices even when tax rates remain unchanged. This generates additional revenue that was not anticipated in the budget. Verité’s position is that this excess can be offset through a centrally financed subsidy, leaving net tax revenue unchanged while reducing the burden passed on to consumers. “You shouldn’t be making excess revenue during an oil price shock,” Rajakulendran said.

A third adjustment extends the same principle beyond fuel itself. Higher fuel prices feed into general price levels across the economy, increasing the base on which VAT and SSCL are applied more broadly. As a result, the government collects additional tax revenue from this inflationary pass-through. 

Estimates cited from IMF analysis suggest that a 50% increase in fuel prices can generate additional consumer inflation of around 5% in the short term, rising further over time. Verité argues that returning this additional revenue to consumers through the pricing mechanism would ease the overall price impact without altering the fiscal position.

Taken together, these adjustments reinterpret how cost-recovery pricing operates under conditions where the formula’s own structure amplifies price increases beyond underlying costs. Verité maintains that such adjustments remain consistent with IMF programme requirements, which focus on preventing losses at state-owned enterprises.

Subsidy and the question of who benefits?

Opposition MP Dr. Harsha de Silva, using back-calculations based on assumed Platts prices of $ 124 per barrel for petrol and $ 172 per barrel for diesel, estimates formula-based retail prices at around Rs. 418.70 and Rs. 483.30 respectively. He argues that the government’s claimed subsidies of Rs. 20 on petrol and over Rs. 100 on diesel are based on these assumed inputs rather than disclosed landed costs.

De Silva has positioned himself firmly against the current pricing policy, though not against formula-based pricing as such. “I am not calling for the abolition of the fuel pricing formula,” he said. “What I am clearly stating is that energy subsidies must be targeted, not universal.” The structural problem with universal fuel subsidies, in his analysis, is that their value scales with consumption. 

Those who use more fuel, through larger vehicles or fuel-intensive businesses, capture a disproportionate share of the fiscal outlay, while low-income households that depend on public transport or small engines derive comparatively little. His preferred response is direct cash transfers to low-income households based on actual income levels.

The President acknowledged the same distributional logic and the same practical barrier. “Subsidies should be targeted at specific communities,” he told Parliament. “Targeting is complex, especially because there is a large informal sector that depends on fuel for livelihoods.” Identifying that sector and reaching it with a cash instrument rather than a blanket price reduction, requires administrative infrastructure that Sri Lanka has not yet built to the required scale.

The disclosure Sri Lanka has not received

Every dispute documented here returns eventually to the same absence. Sri Lankans are being told that fuel is subsidised at the public’s expense, but they are not being shown the landed cost figures that would allow anyone outside the government to verify the size, basis, or legitimacy of that claim. 

A formula that was introduced precisely to depoliticise fuel pricing and make it transparent to the public is instead being deployed selectively, invoked by officials who disagree about whether it was even applied, and producing prices that independent analysts cannot reconcile with any single consistent set of inputs.

 Selected Fuel Price Revisions (Rs. per litre)

Note: Selected revisions are shown for brevity. Monthly price changes have been condensed for clarity and space.

Source: The Morning Money