Fuel prices in south to be cheaper than north

Express May 20, 2010

KARACHI: Fuel prices in the southern regions of Pakistan will be lower as compared to northern parts because of the abolition of the internal freight equalisation margin (IFEM).

The IFEM is used to maintain uniform prices of fuel across the country. The petroleum ministry, on Pakistan State Oil’s (PSO) recommendation, had asked the Economic Coordination Committee to deregulate the inland freight equalisation margin on petroleum products. PSO is expected to benefit the most from IFEM with the power to set market prices because of its high market share, said BMA Capital analyst Muhammad Ali Taufiq in his research report.

The abolition of the inland freight equalisation margin will most likely be announced in the national budget on June 5, according to Topline Securities. The IFEM is used for high speed diesel (HSD), petrol, high octane blending component (HOBC), kerosene and light diesel oil. South versus North It is highly anticipated that the deregulation of IFEM will take its toll on high speed diesel and petrol in the initial period.

Such measures will significantly reduce high speed diesel and petrol prices in the south compared to the northern regions due to the following reasons. Imported petroleum products will be cheaper in Karachi as the port is located in the city, which will keep the transportation cost lower as compared to northern parts of the country. High concentration of refineries in the south will further facilitate the availability of petroleum products and achieve synergies with respect to internal freight charges.

Consumption of petroleum products in the south is highly concentrated in the urban areas which are in close proximity to the port and the refineries, compared to the north where consumption is evenly spread over a larger area PSO to benefit the most Deregulation of IFEM will impact different oil marketing companies in different ways in each province. PSO is expected to benefit the most with the power to set market prices because of its high market share, said the analyst.

PSO has the largest retail distribution network in the country representing 56 per cent of the total. PSO holds a market share of 48 per cent in petrol and 61 per cent in high speed diesel. PSO has an 84 per cent share in Balochistan and can make a price monopoly in the region, the analyst said. Leading players in Sindh - PSO, Shell and Caltex - may decide to keep one price in the province and set up barriers for entry of other oil marketing companies. Punjab would continue to remain a competitive region where major players can collectively set IFEM, added the analyst.

Published in the Express Tribune, May 20th, 2010.


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