Unraveling
the Greek in the proposed petrol price formula
By MUNGAI KIHANYA
The Sunday Nation
Nairobi,
23 November 2008
Motoring columnist Gavin Bennett once wrote that, while making a turn without indicating can confuse other road users, indicating without turning causes even more chaos. The same kind of thing is found in mathematics: A formula with values that are not clearly defined is difficult to understand, but even more confusing is an equation that does not contain some of the quantities that have been defined!
This happened last Sunday in the advert placed in this paper by the Energy Regulatory Commission (ERC) giving the formula for calculating the maximum retail price of petroleum. Some of the quantities that were defined in the write up were not appearing in the equation. Thankfully, the ERC published a correction on Thursday and we can now try to make some sense out of it.
There are two equations: the first one is fairly simple with only plus signs and a few brackets, but the second is a little complex – it has a symbol that looks like the letter “E” written by my two-year-eight-month old daughter!
The first equation gives the retail price (P) in terms of the
“factory-gate” cost of refined product (i.e. at
To get the profit margin, you add the factory gate price to the taxes and then calculate ten percent of the resulting total. According to the formula, this is the total amount to be shared between the petroleum companies and their dealers (retailers). The method of sharing this profit is left open to the two parties to agree upon
The second equation shows how to calculate the “factory-gate” price. In a nutshell, it is the average price of all consignments purchased during the previous month. The reason it is termed as a “weighted average” is that it takes into account the fact that some of the petrol is imported in crude oil form (and the refined) and some is brought into the country already refined. The latter is usually cheaper than the former, but the quantities of these two categories are not equal.
Suppose an oil company imports one million litres of refined product at sh40 each and then purchases 4 million litres through the local refinery at sh60, what would be the average purchase price? The first guess could be that you simply add 40 to 60 and then divide by two to get sh50. However, that would be wrong!
The correct way to go about it is first to add the cost of the first consignment (sh40 million) to that of the second one (sh240 million). Then divide the total cost (sh280 million) by the total volume (5 million litres). The answer is sh56 per litre.
Now, the symbol that looks like the letter “E” written by my daughter; it is the Greek letter sigma, which is equivalent to the English “S”. In mathematics, it stands for the word “sum”…now you know why sometimes math sounds like Greek!
In the formula, the sigma is an instruction to add up all costs for all the consignments during the past month, then add all the volumes of both categories of product and finally divide the two quantities to get the (volume) weighted average cost.
Now you can take last Thursdays nation, look at the formulae and begin making comments to the ERC.
 |
 |