High gas prices hurt nobody except the very poor

Published: September 17, 2018
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Representational image. PHOTO: REUTERS

Representational image. PHOTO: REUTERS

ISLAMABAD: The Economic Coordination Committee (ECC) has again delayed decision on a proposed increase in gas prices which has both political and economic consequences.

The Oil and Gas Regulatory Authority (Ogra) has awarded the tariff, which was not notified by the previous government. Gas prices were not increased earlier partly due to an intervening period in which crude oil prices dived and accordingly wellhead gas prices went down.

However, oil prices have increased again and the gas price revision was long overdue, also because of recent rupee depreciation. SNGPL complains that it buys gas for Rs629 per million British thermal units (mmbtu) and sells for an average of Rs399, resulting in an annual loss of Rs220 billion for the two public gas utilities.

Consequently, being short of cash, the two companies do not pay to gas producers and postpone payment of other government and non-government dues.

Another cycle of circular debt has started to grow. Let us first examine gas prices in the context of regional and international prices.

We live in an interconnected world. Even domestic production and its prices have an international context and relationship. Gas prices have been low in Pakistan as well as gasoline and diesel prices, much lower than most of Europe and even in the regional context.

Gasoline prices in Pakistan are 48% lower than those in India and 38% lower than Bangladesh prices. In the case of diesel, prices in Pakistan are 11% lower than India and 15% higher than Bangladesh.

There may be variation in percentages depending on the location. This difference apparently pertains to New Delhi, where prices are the lowest in India.

In Europe, there is great price competition in gas where both production and trade is in various forms such as pipeline and LNG. India has a comparable socio-economic and political situation.

In Pakistan, retail prices are lower, both for the household sector and industry. Gas prices for the industrial sector are around Rs1,000 per unit both in India and Europe compared to Rs589 even after the price increase in Pakistan. Industrial gas tariff in India and Europe is comparable.

In Pakistan, the highest household gas tariff is 60% that of Gujarat. In Europe, the household gas tariff is four times that of the highest slab in Pakistan.

In Pakistan, even after the increase, the lowest gas tariff has been around Rs100 or so per mmbtu, which is several times lower than that in India.

It may be noted that we have taken Gujarat prices as reference prices for India for two reasons. Firstly, Gujarat is adjacent to Pakistan and secondly Gujarat is one of the most progressive states in India having market economy characteristics.

In Europe, although it is not admitted, there is cross-subsidy by the household sector to the industrial sector, although a difference of more than 100% in household and industrial gas tariffs reflects higher service costs in the household sector.

Fertiliser industry

There are a few areas that must be looked into rather deeply. The fertiliser sector gets a lot of subsidy in terms of cheaper gas prices. Finance Minister Asad Umar himself has spoken of Rs10 billion being swallowed by the sector.

Apparently, fertiliser prices are unregulated. There is a lot of support to the proposition that fertiliser sector subsidies should be given in cash, rather than in the form of cheaper gas, and fertiliser prices should be regulated at the producer level. The issue merits serious and immediate consideration.

However, there is audible and visible resentment and criticism against a 186% price rise proposed for the small and poor class of consumers in one go.

One has to examine as to how much of a drain it would be and how much effect it would have on average prices. I guess not much, however, due to dearth of data one may not be able to insist on it.

Secondly, one would like to question the rationale of continuing with the gas price subsidy in the fertiliser sector and maintaining lower prices than the lifeline consumers. It is certainly an anti-poor bias.

Finally, such unaffordable and large-scale increase in one go may lead to theft, beating the very purpose of escalation. The increase may be reduced to the average level of 46%.

The government does not have many options as except for GST there is no taxation, which in any case is not part of the tariff and is an add-on.

Most (80-85%) of the gas cost/tariff consists of gas purchase under contract with gas producers. In extreme cases, there may be some cajoling of public sector gas producers, but there are limitations.

The only leeway government has is in delaying and causing circular debt or in tinkering with cross-subsidy allocations. We have mentioned the case of gas rates for the very poor and the fertiliser case.

Distribution costs are the minimal and not much leeway is available there. UFG allowance may be played with without much implication for the prices.

From the foregoing, it can be concluded that gas price adjustment and consequent increase is unavoidable and is the right decision. There is, in fact, some playing space both in the petroleum and gas sectors for extracting some revenue from these sectors.

One can estimate revenue potential of an additional of Rs300 billion, if oil prices do not increase anymore. Both the people and the government should be ready to make this sacrifice in the national interest, should the need arise due to the dire circumstances and prospects that appear to be on the horizon.

Government’s sacrifice would be in taking a hard and unpopular decision and people’s in agreeing to pay more without causing disturbances.

The writer is former member energy of the Planning Commission

 

 

Published in The Express Tribune, September 17th, 2018.

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