Increase oil prices up to 16% or pay Rs8b subsidy

Finance ministry official hints at taking a midway course, similar to the last decision.

ISLAMABAD:

The government has been left with two dangerous alternatives — increase prices of oil products in the range of 9.6 to 16.2 per cent or pay a subsidy of around Rs8 billion.

The government is compelled to increase prices of petroleum products next month as continuous political unrest in oil-producing countries including Libya has pushed Gulf crude oil prices to $111.3 per barrel.

A finance ministry official hinted at taking a midway course, similar to one taken earlier this month. However, he said that no final decision has been taken yet.

The government passed on only a five per cent rise in oil prices against a 16 per cent proposed increase while the rest (11 per cent) was borne by the government in the form of payment of Rs8 billion subsidy.

A petroleum ministry official said that if the government decides against passing on the increase to consumers, it will have to absorb a total of Rs16 billion subsidy.

The government has already taken a Rs21 billion hit from the decision of freezing oil prices from December to February and partial transfer of burden for March. In case of absorbing the increase, the total financial impact will come to around Rs37 billion or 0.2 per cent of the total size of economy.

The government has set Rs110 billion target on account of petroleum levy but due to inconsistent policies it only collected Rs34 billion in six months.

The government has worked out Rs7.35 per litre or 9.6 per cent increase in petrol prices, taking the proposed new rate to Rs83.93 per litre against the existing price of Rs76.58. Currently, the government is charging Rs3.16 per litre petroleum levy and Rs11.2 per litre on account of general sales tax.

The major opposing force of the petroleum price increase is the Muttahida Qaumi Movement that favours taking a hit on revenue instead of passing on the hike to consumers.

High Octane Blending Component (HOBC) prices are proposed to be increased by 11.2 per cent or Rs10.15 per litre. The new proposed rate is Rs101.2 per litre against the existing price of Rs90.96. The government is charging Rs5.03 on account of petroleum levy and Rs13.22 sales tax on every litre of HOBC.

The highest increase of 16.2 per cent or Rs12.05 per litre is proposed for kerosene oil. This will take the prices to Rs86.5 against the existing Rs74.45 per litre. The government has already abolished petroleum levy on this fuel but is still charging Rs10.82 per litre sales tax.

High-speed diesel prices are proposed to be increased by Rs10.2 or 12.3 per cent per litre. The new proposed rate is Rs92.34 per litre against the existing rate of Rs82.22. Light diesel oil prices are recommended to be increased by 16.1 per cent or Rs11.28 per litre, taking the price to Rs81.2 per litre.

Published in The Express Tribune, March 25^th, 2011.