“Passing the full impact of the price increase to the consumers, subsidising oil prices, or reducing deemed duty to 5 per cent and passing the residual price increase to consumers, are the options,” said Topline Securities analyst Nauman Khan, while expecting the government to choose the deemed duty option.
Petrol and diesel prices currently stand at Rs73.12 per litre and Rs78.49 per litre, respectively.
Reducing deemed duty
If the government decides to reduce deemed duty and pass on the residual price hike to the final consumer, retail petroleum prices will increase by an average nine per cent.
The government lets refineries charge an extra 7.5 percent duty called deemed duty in order to sell locally-produced diesel at the same price as that of imported diesel. This was imposed to protect refineries against volatility in international oil prices.
The reduction in deemed duty to five per cent will push gross refining margins into negative, said Khan.
Passing the hike to consumers
The government may opt to pass the entire price hike recorded in the last four-month to the final consumer in order to meet the commitment made with the International Monetary Fund (IMF). This scenario will see the price rise by 17 per cent compared with the current prices.
Political pressure on the domestic front had forced the government to hold back from this option in the last price revision.
Subsidising petroleum products
If the government decides to keep the prices unchanged, it will have to provide up to Rs4 billion in monthly subsidies, which may grow in the coming months, owing to the upward pressure on international oil prices.
Published in The Express Tribune, February 24th, 2011.
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