Friday Aug 12 2022

What do the oil price fluctuations mean for Pakistan?

Government recently reduced petrol prices by Rs3.05 — Canva/file
Government recently reduced petrol prices by Rs3.05 — Canva/file

The government recently reduced petrol prices by Rs3.05, bringing the new petrol price to Rs227.19 per litre, and increased diesel prices by Rs8.95 – the new price is Rs244.95 per litre. Petroleum development levy (PLD) has been increased from Rs10 to Rs20 per litre on petrol, and from Rs5 to Rs 10 per liter on diesel. No GST has been charged on the two products so far.

The highly volatile rupee-dollar exchange rate makes petrol prices’ analysis or comparisons quite difficult. The current pricing is based on the weighted average of the exchange rate of the last fortnight at Rs225.9 while earlier prices were based on a low exchange rate of Rs210.

Petroleum prices in the international market have noticed a steady decline. The 15-day average prices for petrol have come down from $121 per barrel to $103 – recording a 15 per cent reduction – and for diesel, these prices have reduced from $149 per bbl to $132 – a 11.4 per cent drop.

Under the IMF agreement, the government has to increase petroleum levy gradually to Rs50 per litre. Another Rs10 increased may have to be introduced in this respect. If oil prices do not go down and the exchange rate does not stabilize at the reasonable level of Rs210, another increase will be inevitable.

The government still has some space available in the form of custom duties which it levies at around Rs23-25 per litre. There is some confusion around custom duties and their purpose. Is it to generate revenues or to support local refineries? There used to be ‘deemed duties’ which have perhaps been eliminated. There might be some justification for such duties earlier, but now in the times of heavy refinery margins and earnings, there is no need for such support.

Petroleum pricing in Pakistan is done on the basis of landing prices of Pakistan State Oil (PSO), which tenders its procurements regularly. Recently, high premiums were charged by suppliers, which may partly be influenced by low PSO risk-rating. One does not understand why there is custom duty on gasoline imports from China, which has been benefiting from low-priced supplies from Russia and Iran. Some joint ventures (JVs) with Chinese oil companies may enable us to get lower prices and premiums. There are some procurement and logistics inefficiencies as well which should be removed if the government wants to reduce petroleum prices. However, the issue is any improvement in PSO efficiency hurts local refineries.

The South Asian region recently saw a bombshell of petrol prices. Bangladesh increased petrol prices by 45 per cent and diesel/kerosene prices by 41.7 per cent. Petrol prices in Bangladesh are now $1.366 per litre as opposed to $0.961 per litre in Pakistan; diesel prices are $1.198 per litre as opposed to $0.98 per litre in Pakistan. This is despite a significant reduction in Brent prices. However, a heavy exchange rate reduction has influenced affordability in Pakistan.

Petroleum prices in Bangladesh, after the recent hike, are almost comparable with that in India. Earlier, petrol prices in the country were almost the same as in Pakistan. Bangladesh is also facing severe economic difficulties, despite a relatively mild current account deficit issue, and is keeping oil prices low in order to be competitive in exports with regional countries. It has also approached the IMF, but it is in a much-better situation than us.

In India, petrol prices are 37.5 per cent higher than in Pakistan and Bangladesh. These prices are deregulated, and there is mildly heavy taxation, which is still much lower than in Europe. Also, India imposes both federal excise tax and state VAT on petroleum products. In Pakistan, the Inland Freight Equalization Margin (IFEM) is charged to average transport cost and keep the prices uniform throughout the country, except for some minor differences.

In India, there is wide variation among states due to VAT and transportation costs. In New Delhi, prices are the lowest these days. Petrol in Bombay is available at INR111.3 per litre. In Delhi, the price is INR96 per litre; diesel prices also vary accordingly.

On average, taxation in India is 40-42 per cent of the selling price as opposed to 12-13 per cent in Pakistan. This is partly due to no GST. If IMF requirements are met and GST is charged, the taxation level in Pakistan will be almost the same as that in India.

If taxes and selling expenses are removed, gasoline base prices in Pakistan will be 23.9 per cent higher than in India – diesel prices will be 11 per cent higher. This is a back-of-the-envelope estimate. India has a large oil refining industry. It exports petroleum products despite meeting huge domestic demand. It only imports crude oil.

Pakistan has a small refinery sector, which caters to 40 per cent of the local requirement, and the rest is imported. Since Pakistan draws upon equally or more competitive and efficient world oil refineries than that of India, its base prices should not be higher.

High international oil prices and the falling rupee have affected Pakistan’s economy, causing heavy inflation since almost everything is dependent on oil. It is hoped that international oil prices will see a significant drop soon (Brent prices have already come down to $95 per barrel. If the dollar-rupee exchange rate is brought to a reasonable level, our difficulties may be controlled. Hopefully, with the IMF agreement, this will be achieved.

The writer is a former member of the Energy Planning Commission. He can be reached at: [email protected]

Originally published in The News